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SOME  PROBLEMS  IN 
CURRENT  ECONOMICS 


BY 

M.  C.  RORTY,  M.E.,  E.E. 

PRESIDENT  OF  THE  NATIONAL  BUREAU  OF  ECON03IIC  RESEARCH,  INC.  ; 
VICE  PRESIDENT  AND  FBI  LOW  OF  THE  AMERICAN  STATISTICAL 
association;  assistant  vice  president  OF  THE  AMERICAN 
TELEPHONE  AND  TELEGRAPH  C03IPANY ;  MEMBER  OF  THE  NATIONAL 
RESEARCH   COUNCIL,   ETC. 


A.  W.  SHAW  COMPANY 

NEW    YORK  CHICAGO  LONDON 


COPYRIGHT,    1922 

BY 

A.  W.  SHAW  COMPANY 


PBIKTED  IN  THE   UNITED   STATES   OF  AMSBICA 


CONTENTS 

Preface 6 

Chapter  I.     Industrial  History 11 

The  Feud  Spirit  in  Industry — The  Problems  of 
Business  Management — What  Men  Live  for — The 
Beginnings  of  Human  Organization — The  Industrial 
Revolution — The  Present  Situation — The  Problems  of 
the   Future. 

Chapter  II.     Social  and  Industrial 

Organization 36 

The  Basic  Viewpoints — The  Purposes  of  Human 
Organization — The  Origins  of  American  Government 
— The  Autocratic  Idea — The  Need  for  Compromise — 
The  Possible  Answer — The  Gradations  in  Regulation 
and  Control — Where  the  Real  Gains  May  Be  Made — 
The  Final  Problem. 

Chapter  III.  Production  and  Distribution.  ...  59 
The  Going  Machine — ^The  Flow  of  Income  and  Ex- 
penditure— Making  a  Job  for  the  New  Worker — 
The  Growth  of  Industrial  Machinery — The  Business 
Cycle — Credit  Expansion  and  Contraction — The 
Quantity  Theory  of  Money — How  May  Business  De- 
pressions Be  Prevented? 

Chapter  IV.     Some    Pertinent   Statistics 86 

Statistics  versus  "The  Statistic" — The  Questions  to 
Be  Answered — The  Increase  in  Physical  Production — 
Tlie  Increase  in  Real  Wages — The  Size  of  the  National 
Income — The  Distribution  of  the  National  Income 
Among  Individuals — The  Distribution  of  the  National 
Income  Between  Factors  in  Production — Can  the 
Share  of  Labor  Be  Increased? — Efficiency  and  Waste. 

Chapter  V.     Facing  the  Facts 113 

A  Recognition  of  New  Conditions — Population  and 
Natural  Resources — Immigration — The  Distribution 
of  Income — The  Average  Rate  of  Profit — -The  Profits 
of  Marginal  Concerns — The  Relative  Monopoly  Power 
of  Labor  and  Capital — A  Special  Viewpoint — A  Con- 
structive Program. 

3 


PREFACE 

THE  substance  of  tlie  present  volume  of 
essays  on  industrial  economics  is  taken 
almost  without  change  from  a  series  of 
economic,  financial,  and  statistical  studies 
undertaken  by  the  writer  as  an  incident  to  his 
connection  with  a  large  public  utility  organiza- 
tion. 

Each  chapter  is  substantially  complete  in  it- 
self. However,  the  first  four  follow  a  definite 
sequence,  and  the  fifth,  in  a  sense,  completes 
the  series  by  discussing  the  application  to  cur- 
rent proposals  for  the  improvement  of  working 
conditions  of  the  facts  and  points  of  view  pre- 
sented in  the  preceding  chapters. 

The  volume,  as  a  whole,  makes  no  pretense  to 
thoroughness  from  the  standpoint  of  the 
trained  economist.  Such  merit  as  it  may  claim 
as  introductory  reading  in  economics  for  the 
business  man,  and  for  the  student  who  may 
or  may  not  expect  to  make  a  more  thorough 
study  of  the  science,  arises  very  directly  from 
the  manner  in  which  the  text  originated. 

After  nearly  twenty  years'  experience  as 
engineer  and  executive,  the  necessities  of  the 
writer's  emploj^ment  compelled  him,  as  a  very 
practical    matter,    to    undertake    a    study    of 

6 


6     CURRENT  ECONOMIC  PROBLEMS 

economic  fact  and  theory.  In  nearly  every 
case  the  initial  study  of  theory  was  incidental 
to  the  pressing  demands  of  some  practical 
problem.  Further  study  frequently  followed  as 
the  result  of  natural  interest,  and  in  prepara- 
tion for  other  similar  problems,  but  the  initial 
impetus  almost  always  arose  from  a  definite 
business  need.  This  peculiar  background  for 
the  several  essays,  while  explaining  certain 
omissions,  may  also,  it  is  hoped,  give  the  vol- 
ume some  degree  of  special  usefulness  to  the 
practical  man  who  feels  the  need  for  a  general 
knowledge  of  economics,  but  lacks  the  time  nec- 
essary for  the  reading  of  more  technical  and 
extensive  treatises. 

Still  a  further  word  of  explanation  may  be 
proper  as  to  the  writer's  fundamental  view- 
points. So  far  as  it  has  seemed  possible  to  do 
so,  the  various  discussions  have  been  based  on 
fact  rather  than  opinion  or  personal  judgment. 
But  the  science  of  economics  is  not  yet  com- 
plete, and  it  is  particularly  incomplete  in  that 
range  where  human  instincts  and  motives  are 
involved.  The  writer  yields  to  no  one  in  his 
desire  to  see  ideals  of  fair  dealing,  of  public 
sei^ice,  and  of  cooperation,  increase  their  in- 
fluence in  all  lines  of  human  activity,  and  par- 
ticularly in  the  great  field  of  the  production 
and  distribution  of  essential  commodities  and 
services.  Yet  he  sees  nothing  in  economic  or 
human  history  to  indicate  that  sound  progress 


PREFACE  7 

can  be  attained  in  any  way  but  through  gradual 
evohition  from  our  present  capitalistic  sys- 
tem. And  he  feels  that  such  evolution  can- 
not safely  precede,  but  must  always  follow,  the 
development  of  the  knowledge  and  intelligence 
and  practical  ideals  of  the  average  man.  So  far, 
therefore,  as  he  would  take  issue  with  his  more 
radical  and  idealistic  friends  it  would  be  on 
this  ground — that  they  hope  to  introduce  eco- 
nomic systems  which,  in  his  opinion,  would  be 
operative  only  in  the  hands  of  public  spirited 
and  specially  intelligent  men,  while  he  would 
cling  to  that  system  which  is  the  outgrowth  of 
average  ideals  and  motives  until  the  average 
man  has  so  progressed  as  to  justify  a  forw^ard 
step  in  economic  organization. 

Such  differences  in  viewpoint  must  always 
exist — and  it  is  desirable  that  they  should  exist. 
Nevertheless,  among  those  of  differing  view- 
points Avho  are  sincerely  seeking  for  the  truth, 
there  is  a  common  meeting  ground  in  the  search 
for  the  actual,  tangible  facts  which  must  un- 
derly  all  sound  economic  reasoning.  These  in- 
troductory notes  would  not  be  complete  with- 
out some  special  acknowledgment  to  the  direc- 
tors of  the  National  Bureau  of  Economic  Re- 
search, Inc.  During  its  existence  of  less  than 
three  years,  this  Bureau  has  demonstrated  that 
labor  leaders,  socialists,  professional  econ- 
omists, and  business  men  can  cooperate  with 
mutual  tolerance  and  good  will  in  the  effort  to 


8     CURRENT  ECONOMIC  PROBLEMS 

agree  upon  a  common  body  of  economic  facts 
and  ''for  impartial  investigations  in  the  field 
of  economic,  social  and  industrial  science. ' ' 

Under  the  procedure  which  the  Bureau  fol- 
lows, findings  of  fact  must  be  divorced  from 
conclusions  or  propaganda,  and,  in  addition, 
any  director  may  express  dissenting  analyses 
of  the  facts  by  appending  foot-notes  to  any 
report  that  is  approved  by  a  majority  of  the 
directors.  Individual  directors  are  not  pre- 
cluded from  publishing  their  personal  opinions. 
Nevertheless,  the  writer,  in  view  of  his  present 
incumbency  as  president  of  the  Bureau,  has 
hesitated  to  publish  the  present  volume  (for 
which,  of  course,  the  Bureau  assumes  no  re- 
sponsibility) without  some  special  effort  to 
avoid  what  might  seem  to  be  an  ultra-conser- 
vative viewpoint.  Perhaps  a  partial  solution 
has  been  found  by  submitting  the  text  to  cer- 
tain of  his  more  radical  friends,  including  active 
labor  leaders,  and  socialists,  and  inserting  the 
substance  of  their  comments  as  foot-notes. 
The  bulk  of  this  comment  has  been  supplied 
by  a  specially  well-informed  and  temperate- 
minded  socialist,  who  is  also  a  strong  sup- 
porter of  the  labor  union  movement.  It  is 
not  at  all  certain  that  the  reader  may  not  find 
special  value  in  this  opposition  of  viewpoints 
as  expressed  in  the  text  and  the  comment. 

Acknowledgments  are  particularly  due  to 
Edwin  F.  Gay,  Wesley  C.  Mitchell  and  Harry 


PREFACE  9 

W.  Laidler  for  many  helpful  comments  and 
pertinent  criticisms.  Much  of  the  good  in  the 
volume  is  theirs — the  errors  are  mine.  Special 
thanks  must  finally  be  offered  to  Messrs.  S.  L. 
Andrew  and  R.  S.  Coe  among  the  writer's  busi- 
ness associates,  for  much  detailed  assistance 
and  many  constructive  suggestions. 


M.  C.  Rorty. 


195  Broadway, 

New  York  City. 
August  1,  1922. 


CHAPTER  I 

INDUSTRIAL  HISTORY 

THE  FEUD  SPIRIT  IN   INDUSTRY 

AFEAV  years  ago,  a  company  operating 
out  of  Pittsburgh  became  rather  un- 
willingly involved  in  a  three-cornered 
business  deal  where  the  other  two  corners  were 
occupied  by  opposing  factions  of  West  Vir- 
ginia mountaineers.  The  situation  soon  became 
heated,  and  then  more  heated,  until,  in  despair 
of  any  other  solution,  an  ex-judge  of  the  county 
was  called  upon  to  secure  a  court  order  to  re- 
strain one  of  the  groups  of  mountaineers  from 
interfering  with  the  arrangements  made  by  the 
other.  The  preliminary  order  was  secured  in  due 
course,  but,  a  few  days  before  the  date  set  for 
the  hearing,  the  Pittsburgh  company's  elderly 
attorney  sent  word  that  he  wished  to  withdraw 
from  the  case.  He  was  promptly  reached  by 
telephone  and  asked  to  explain,  "Well,"  said 
he,  ''there'll  be  shootin's,  an'  murders,  an' 
burnin's  for  three  generations  over  this  affair 
already,  and  I've  got  to  live  with  these  folks." 
There  was  no  answer  to  this  statement,  so  the 
matter  was  compromised  by  agreeing  to  drop 
the  legal  proceedings  if  the  old  judge  would 
get  the  opposing  groups  together  and  attempt 
to  bring  about  a  friendly  settlement.    This  he 

11 


12    CURRENT  ECONOMIC  PROBLEMS 

did,  and  his  speech  on  the  occasion  of  the  joint 
meeting,  while  it  touched  very  lightly  indeed 
upon  the  original  source  of  the  difficulty,  was 
nevertheless  declared  by  those  present  to  be 
the  most  profound  and  masterly  discussion  of 
proper  and  improper  reasons  for  starting  a 
feud  that  had  ever  been  heard  in  the  State  of 
West  Virginia.  At  any  rate,  it  had  the  result 
that  both  factions  agreed  that  their  differences 
did  not  justify  ''shootin's,  an'  murders,  an' 
burnin's  for  three  generations,"  and  the  mat- 
ter was  finally  settled  in  amicable  fashion. 

The  point  of  this  incident,  as  applied  to  the 
present  economic  situation,  is  that  no  one  has 
yet  drawn,  for  employer  and  employee,  or  for 
business  organizations  and  the  general  public, 
a  clear  dividing  line  between  what  should  be 
the  basis  for  a  feud  and  what  the  basis 
for  a  temperate  and  constructive  difference 
of  opinion.  At  the  present  time  the  air  is 
filled  with  conflicting  proposals  for  the  cure 
of  the  many  real  and  imaginary  economic  ills 
that  afflict  us.  If  we  took  all  of  the  medicines 
prescribed,  we  should  soon  be  in  the  position  of 
a  man  who  tried  to  cure  the  colic  by  beginning 
at  one  end  of  the  drug  store  shelf  and  sampling 
liis  way,  way  do^vn  the  line  to  the  other  end.  The 
need  today  is,  therefore,  specially  great,  in  the 
interest  of  all  business  and  industry,  for  a  full 
and  dispassionate  understanding  of  the  real 
facts. 


INDUSTRIAL  HISTORY  13 

THE   PROBLEMS   OF  BUSINESS  MANAGEMENT 

In  the  pioneer  days  in  this  country,  the  prob- 
lems of  business  and  economics  were  relatively 
uncomplicated.  These  paragraphs  are  being 
written  in  a  back  country  farm  house,  so  far 
from  the  railroad  that  coal  is  an  unknown  lux- 
ury. Only  a  few  years  ago  a  Chinese  wall 
might  have  been  built  across  the  mouth  of  the 
valley,  with  little  change  in  the  life  of  the  peo- 
ple. In  fact,  if  such  a  wall  were  built  today, 
the  old  equipment  —  spinning-wheels,  hand- 
looms,  smoke  houses,  slaughtering  frames,  sap 
houses,  blacksmith's  forges,  and  wood-working 
tools — is  still  at  hand  and  many  items  are  in 
daily  use.  Fertile  land  can  still  be  had  for  $10 
an  acre — barely  the  value  of  the  standing  tim- 
ber. 

Here  the  problems  of  wages,  profits,  and 
rents  are  simple  and  elementary.  After  heavy 
rains,  a  few  fine  days  have  given  a  chance 
for  hay  cutting.  The  writer  has  helped  his 
host  cut  and  load  the  valley  hay.  There  are 
still  difficult  mountain  fields  of  poorer  hay  to 
be  cut.  Hay  can  be  bought  for  $10  a  ton.  A 
hired  man  can  be  had  for  $3  or  $4  a  day  and 
board.  The  balance  is  very  even.  There  is 
little  chance  for  argument  between  the  farmer 
and  his  employees.  The  profit  to  my  host  will 
be  very  doubtful  if  he  must  pay  a  hired  man. 
Probably  the  mountain  fields  will  be  cut  if  the 


14         CURRENT   ECONOxMIC    PROBLEMS 

writer  volunteers  to  help — otherwise  they  may 
not  be  worth  the  cutting. 

If  all  of  modern  industry  were  organized 
along  such  simple  lines  and  the  relations  be- 
tween wages  and  pi'oductivity  were  equally 
simple  and  direct,  many  of  our  present-day  con- 
troversies would  vanish.  Yet  in  many  respects 
the  problems  are  still  the  same.  Each  owner 
of  a  competitive  business  seeks  to  expand  his 
operations  until  he  reaches  a  point  where 
added  wages  and  added  costs  for  borrowed 
money  leave  his  margin  of  profit  in  doubt. 
Wages,  in  the  end,  are  still  determined  by  pro- 
ductivity. The  individual  worker  may  not  al- 
ways have  his  choice  of  employment,  or  of 
working  for  himself,  but  on  the  whole  there 
is  still  an  effective  mobility  of  labor  and  no  one 
occupation  can  for  long  pay  greater  or  lesser 
rewards  than  another  for  equal  skill  and  effort. 
Changes,  readjustments,  progress,  and  the 
elimination  of  abuses  are  required — but  an 
even  greater  need  is  for  clear  understandings. 

In  the  regulated  public  utilities  the  relations 
between  the  employees,  the  investors,  and  the 
public  are  particularly  simple.  There  is  no 
absolute  measure  of  what  wages  of  public  util- 
ity employees  should  be.  Such  employees  con- 
stitute, however,  a  selected  and  specially  com- 
petent group  of  workers.  They  have  special 
responsibilities.  And  the  public  should  furnish 
the  revenues  necessary  to  enable  them  to  be 


INDUSTRIAL  HISTORY  16 

paid  at  least  as  well  as  workers  in  comparable 
occupations  in  the  localities  they  serve. 

Similarly  as  to  payments  to  bondholders  and 
stockholders,  the  bonds  and  stocks  of  public 
utilities  represent  real  money  invested.  The 
occasional  "watering"  of  former  days  has,  in 
most,  if  not  all  cases,  been  wiped  out  by  the 
recent  shrinkage  in  the  value  of  the  dollar.  In 
many  instances  premiums  paid  for  new  stock 
issues  have  caused  the  actual  money  invested 
to  exceed,  by  substantial  amounts,  the  face  value 
of  outstanding  securities.  Many  millions  of 
dollars  worth  of  public  utility  stocks  are 
owned,  or  are  in  process  of  purchase  on  easy 
terms,  by  public  utility  employees.  It  is,  there- 
fore, not  only  right,  but  necessary,  that  the 
investors  in  public  utility  securities  shall  re- 
ceive returns  reasonably  comparable  with  those 
that  they  might  receive  if  they  invested  in  other 
businesses. 

Furthermore,  the  public  utilities  must  grow. 
They  have  no  choice  as  to  this.  Many  addi- 
tions must  be  made  as  a  matter  of  public  neces- 
sity, if  for  no  other  reason.  The  utilities  can- 
not grow,  however,  without  securing  large  sums 
of  new  money  each  year.  Some  new  plant  can 
be  built  out  of  amounts  set  aside  for  the  re- 
placement of  worn-out  and  obsolete  equipment. 
A  little  can  be  built  out  of  surplus  earnings. 
But  the  bulk  must  be  built  out  of  new  money 
secured  in  the  open  market  in  competition  with 


16    CURRENT  ECONOMIC  PROBLEMS 

every  other  business  that  needs  new  money, 
and  with  governments,  states,  and  municipal- 
ities as  well.  To  secure  such  money,  the  utili- 
ties must  not  only  offer  attractive  inducements 
to  new  investors,  but,  as  an  assurance  to  such 
new  investors,  must  also  pay  reasonable  re- 
turns to  present  stockholders  and  bondholders, 
and  must  give  further  evidence  of  financial 
soundness  by  showing  their  ability  to  lay  aside 
each  year  a  substantial  surplus,  after  all  re- 
quirements for  labor,  materials,  interest,  and 
dividends  have  been  met. 

These,  then,  are  the  special  problems  of  pub- 
lic utility  management — to  secure  adequate 
wages  for  employees;  to  secure  adequate  re- 
turns for  old  and  new  investors;  and,  by  fur- 
nishing good  service  and  proving  economy  in 
management,  to  secure  from  the  public  the 
rates  necessary  for  both  requirements.* 

As  indicated  in  the  prefatory  note,  the  pres- 
ent volume  is  the  outgrowth  of  a  series  of 
studies  by  the  writer  bearing  directly  and  in- 

*The  socialists  and  advocates  of  public  ownership  of  utilities 
claim  that  interest  charges  and  dividends  could  ultimately  be 
largely  eliminated  under  such  ownership.  The  public  utility 
managers  claim,  on  the  other  hand,  that  such  savings  are 
theoretical  rather  than  real,  that  actual  experience  indicates  a 
greater  probability  that  governmental  operation  would  result 
in  continually  growing  deficits  to  be  met  by  taxation,  and  that 
in  any  case,  without  radical  improvements  in  the  management 
of  public  affairs,  the  wastes  under  governmental  or  socialized 
control  would  much  more  than  offset  any  possible  savings  in 
capital  charges. 


INDUSTRIAL  HISTORY  17 

directly  upon  these  and  other  problems — upon 
the  economic  relationship  between  employees 
and  owners  in  public  utility  service  and  in  in- 
dustry as  a  whole,  and  upon  the  mutual  rela- 
tions of  both  employees  and  owners  to  the 
general  public.  Liberal  references  have  been 
made  to  books,  periodicals,  and  pubhshed  re- 
ports and  documents,  in  order  that  those  who 
wish  to  do  so  may  gain,  through  further  read- 
ing, a  more  thorough  knowledge  of  those  basic 
principles  which  must  determine  any  sound 
solution  of  current  industrial  and  economic 
problems. 

WHAT  MEN  LIVE   FOR 

Political  economy,  like  everything  else  affect- 
ing the  lives  of  men  and  women,  must  finally 
be  tested  by  the  aid  it  gives  to  normal  human 
beings  in  securing  the  things  that  they  desire. 

For  the  average  man  these  desires  are  sim- 
ple— life  and  health;  comfort  and  security  for 
home  and  family;  regularity  and  certainty  of 
employment ;  work  that  can  be  done  with  pride 
and  self-respect;  proper  leisure  for  reading 
and  recreation;  and,  above  all,  the  feeling  that 
the  conditions  that  affect  him  are  just  and  that 
he  has  a  reasonable  voice  in  determining  them. 

In  the  past,  political  economy  has  been  called 
the  "dismal  science,"  for  it  began  and  ended 


18    CURRENT  ECONOMIC  PROBLEMS 

in  a  fog  of  theories  which  rarely,  if  ever,  gave 
workable  answers  to  the  real  problems  of  hu- 
man life.  Today,  the  economists  are  speaking 
in  plain  language  of  the  things  that  directly 
concern  the  lives  of  ordinary  men.  So  far, 
then,  as  the  present  volume  shall  show  the  way 
to  better  living  conditions,  and  shall  indicate 
when  and  to  what  extent  protest  is  justified  and 
w^here  and  to  what  extent  there  should  be  con- 
tentment with  things  as  they  are,  it  shall  have 
served  its  purpose.  And  just  to  the  extent  that 
it  falls  short  of  this  end,  it  shall  have  failed. 

THE     BEGINNINGS     OF    HUMAN     ORGANIZATION 

The  practical  science  of  economics  does  not 
begin  w^ith  the  cave  man,  or  vnth  the  wander- 
ing savage,  but  with  men  who  have  learned  that 
they  can  better  satisfy  their  needs  by  gather- 
ing together  in  organized  nations  and  business 
enterprises.  The  beginnings  of  such  organ- 
ization are,  however,  hidden  in  the  days  be- 
fore written  history  began.  The  long  ages 
of  slow  development  and  the  sudden  flowering 
of  our  modern  civilization  are  well  brought 
out  by  one  writer*  who  says: 

"In  order  to  understand  the  light  which  the  dis- 
covery of  the  vast  age  of  mankind  easts  on  our  pres- 
ent position,  our  relation  to  the  past,  our  hopes  for 
the  future,.    ...   let  us  imagine  the  whole  history 

*Page  239,  The  New  History,  by  James  H.  Eobinson. 


INDUSTRIAL  HISTORY  19 

of  mankind  were  crowded  into  twelve  hours  and  we 
are  living  at  noon  of  the  long  human  day.  .  .  For 
over  eleven  and  one-half  hours  there  is  nothing  to 
record.  We  know  of  no  persons  or  events;  we  only 
infer  that  man  was  on  earth,  for  we  find  his  stone 
tools,  bits  of  his  pottery,  and  some  of  his  pictures 
of  mammoth  and  bison.  At  twenty  minutes  before 
twelve  the  earliest  vestiges  of  Egyptian  and  Baby- 
lonian civilization  begin  to  appear.  The  Greek  lit- 
erature and  philosophy  to  which  we  owe  so  much  are 
not  seven  minutes  old.  At  one  minute  before  twelve 
Lord  Bacon  wrote  his  'Advancement  of  Learning,' 
and  not  one-half  a  minute  has  elapsed  since  man  first 
began  to  use  the  steam  engine  to  do  his  work  for 
him." 

Human  organization  undoubtedly  had  its  be- 
ginning through  the  grouping  together  of  indi- 
viduals and  families  into  tribes  for  self -protec- 
tion. With  this  grouping  together  for  protec- 
tion, there  undoubtedly  came  also  the  begin- 
nings of  barter  and  trade  and  of  specialization 
of  work.  Some  men  became  hunters,  others 
fishermen,  and  others  herdsmen  and  tillers  of 
the  soil.  But  organized  production  on  a  large 
scale  was  unknown.  Work  was  specialized 
only  to  the  extent  that  the  use  of  hand  tools 
made  such  specialization  possible.  Political 
organization  was  primarily  of  a  military  type. 
Measures  begun  for  protection  were  later  per- 
verted to  the  uses  of  aggression.  When  famine 
and  pestilence  did  not  keep  numbers  down,  the 
more  populous  tribes,  from  time  to  time,  swept 
over  their  natural  boundaries  and  invaded  their 


20    CURRENT  ECONOMIC  PROBLEMS 

neighbors'  lands.  The  leaders  elected  by  the 
free  will  of  a  tribe  assumed  hereditary  rights, 
and  their  descendants  became  despots  to  main- 
tain their  power.  With  the  crude  tools  and 
methods  employed  in  production,  even  the  free 
man  could  barely  earn  for  himself  the  rudest 
kind  of  food,  shelter,  and  clothing,  while  large 
elements  of  all  populations  were  held  in  actual 
or  virtual  slavery. 

These  conditions  existed  in  Egypt  and 
Babylon  5,000  years  before  the  Christian  era 
began,  and  with  only  brief  and  rare  exceptions 
they  continued  through  all  the  years  of  re- 
corded history  until  the  beginning  of  the  eight- 
eenth century.  It  is  even  possible  that  condi- 
tions were  worse,  in  some  respects,  at  the  end 
of  this  long  period  than  at  the  beginning.  Cer- 
tainly there  cannot  have  been  much  improve- 
ment, if  we  may  trust  the  British  historian*, 
writing  in  the  year  1848,  when  he  describes 
the  days  of  1685  as  ''times  when  noblemen  were 
destitute  of  comforts  the  want  of  which  would 
be  intolerable  to  a  modern  footman,  when  farm- 
ers and  shopkeepers  breakfasted  on  loaves,  the 
very  sight  of  which  would  raise  a  riot  in  a  mod- 
ern workhouse,  when  men  died  faster  in  the 
purest  country  air  than  they  now  die  in  the 
most  pestilential  lanes  of  our  towns,  and  when 
men  died  faster  in  the  lanes  of  our  to^fvns  than 
they  now  die  on  the  coast  of  Guiana." 

•Page  397,  History  of  England,  by  T,  B.  Macaulay. 


INDUSTRIAL  HISTORY  21 

THE    INDUSTRIAL    REVOLUTION 

During  all  the  years  of  this  first  stage  in  in- 
dustrial history,  up  to  the  middle  of  the  eight- 
eenth century,  progress  in  practical  science  and 
in  manufacturing  methods  had  been  very  small. 
Gompowder  and  the  mariner's  compass  had 
been  invented.  Shipping  and  commerce  had  de- 
veloped, and  much  attention  had  been  given  to 
the  implements  of  warfare.  But  agriculture 
was  as  it  had  been  for  generations.  Buildings 
were  erected  as  in  the  days  when  Christ  was  a 
carpenter;  and  the  carpenter's  chisel  of  Eng- 
land was  still  made  by  the  same  crude  methods 
as  the  Roman  sword.  Even  the  fundamental 
art  of  weaving  cloth  had  seen  little  advance 
and,  as  stated*  by  one  writer,  ''In  the  textile 
industry  .  .  .  but  two  changes  in  the  methods 
of  doing  work  had  been  made  between  the  time 
of  the  Greek  civilization  and  the  latter  part  of 
the  eighteenth  century.  Penelope,  who  worked 
at  her  loom  while  awaiting  the  return  of 
Ulysses,  would  have  found  nothing  very  strange 
in  the  art  of  weaving,  could  she  have  made  a 
visit  to  the  home  of  a  textile  worker  in  the  be- 
ginning of  the  reign  of  George  III.  The  spin- 
ning wheel  had  taken  the  place  of  the  distaff, 
and  a  rough  contrivance  like  the  water  wheel 
had  come  into  use  for  fulling  cloth.  Outside  of 
these  two  inventions,  the  processes  of  carding, 

*Page  88,  Description  of  Industry,  by  H.  C.  Adams, 


22    CURRENT  ECONOMIC  PROBLEMS 

spinning,  dyeing,  weaving,  and  finishing  cloth 
were,  in  England  in  1760,  what  they  had  been 
the  world  over,  time  out  of  mind. ' ' 

Yet  the  seeds  of  change  had  been  sown.  The 
printing  press  was  invented  about  the  year 
1451,  and  through  its  agency  the  scattered  frag- 
ments of  ancient  sciences  were  gathered  to- 
gether and  made  available  to  a  constantly  in- 
creasing circle  of  readers.  Under  this  influence 
there  began  in  Italy,  about  the  year  1500,  the 
Renaissance,  or  Revival  of  Learning.  The 
progress  of  pure  science  thereafter  was  rapid. 
Astronomy  moved  forward  with  quick  strides 
from  the  invention  of  the  telescope  by  Galileo 
to  the  discovery  of  the  laws  of  gravitation  by 
Isaac  Newton.  Physics  and  chemistry  were  es- 
tablished as  definite  sciences,  and  mathematics 
in  the  hands  of  Descartes,  Leibnitz  and  Euler 
became  a  powerful  tool  ready  for  the  hand  of 
the  engineer  and  designer. 

This  new  knowledge  did  not  add  directly  to 
human  comfort,  but  practical  applications  soon 
followed.  The  invention  of  the  spinning  jenny 
by  Hargraves  in  1765,  and  the  ''mule"  (a  tex- 
tile machine),  by  Crompton  in  1779,  with  va- 
rious modifications  and  improvements,  soon 
completely  revolutionized  the  industry  of  weav- 
ing. The  invention  of  the  steam  engine,  which 
was  first  patented  as  a  pumping  device  in  1769 
and  was  applied  to  the  propulsion  of  machin- 
ery 13  years  later,  proved  the  essential  factor 


INDUSTRIAL  HISTORY  23 

in  making  possible  the  rise  of  the  factory  sys- 
tem, which  brought  about  that  change  from  lim- 
ited production  by  hand  to  quantity  production 
by  machinery  which  is  known  as  the  ''Indus- 
trial Revolution." 

The  effects  of  this  revolution  in  increasing 
the  productive  power  of  mankind  have  perhaps 
nowhere  been  described  better  than  by  Marx 
and  Engels,  in  the  ''Communist  Manifesto"  of 
1848*,  when  they  said  that  the  capital  newly 
organized  to  meet  the  changed  industrial  con- 
ditions "during  its  rule  of  scarce  100  years 
has  created  more  massive  and  more  colossal 
productive  forces  than  have  all  preceding  gen- 
erations together.  Subjection  of  nature's 
forces  to  man,  machinery,  application  of  chem- 
istry to  industry  and  agriculture,  steam-navi- 
gation, railways,  electric  telegraphs,  clearing 
of  whole  continents  for  cultivation,  canalization 
of  rivers,  whole  populations  conjured  out  of  the 
ground — what  earlier  century  had  even  a  pre- 
sentiment that  such  productive  forces  slum- 
bered in  the  lap  of  social  labor?" 

A  further  direct  effect  of  the  industrial  rev- 
olution was  to  bring  about  a  very  great  in- 
crease in  population  in  the  countries  where  fac- 
tory methods  were  introduced.  This  increase  is 
strikingly  indicated  by  the  chart  (page  25) 
of  the  population  of  England  and  Wales  from 
1100  to  1900,  on  which  is  shown  a  population 

*Quoted  on  page  10,  Socialism  in  Thought  and  Action,  by 
H.  W.  Laidler. 


24    CURRENT  ECONOMIC  PROBLEMS 

very  slowly  increasing  from  about  2,000,000  in 
the  year  1100  to  about  6,000,000  in  the  year 
1750,  with  a  rapid  upsweep  to  14,000,000  in 
1831,  when  the  factory  system  had  become  well 
established,  and  with  a  further  increase  to 
about  33,000,000  by  1900. 

With  this  rapid  increase  in  population,  it 
appeared  for  a  time  that  the  increase  in  mouths 
to  feed  and  bodies  to  cover  would  absorb  all  of 
the  increased  production  that  science  had 
brought  about.  So  real  was  this  fear  that  in 
1798  Malthus  published  his  famous  essay  on 
''Population"  in  which  he  attempted  to  show 
that  there  was  a  tendency  for  population  to 
increase  up  to  the  limit  of  subsistence,  and  that 
this  tendency  would  always  prevent  any  sub- 
stantial improvement  in  the  standard  of  living 
of  the  masses  of  the  people.  Subsequent  de- 
velopments have  shown  these  extreme  forebod- 
ings to  be  unwarranted.  Daily  wages  of  car- 
penters and  masons  in  England  between  the 
years  1766  and  1800  averaged  little  more  than 
the  price  of  one-third  of  a  bushel  of  wheat.  By 
the  year  1882  they  had  risen  until  a  day's  wage 
would  buy  three  times  this  quantity;*  and  ap- 
proximately the  same  increases  in  real  wages 
had  taken  place  throughout  the  entire  range  of 
industrial  employment.  While,  therefore,  the 
rapid  increases  in  population  that  arise  out  of 
modern  industrial  developments  may  have  a 

'•Page  313,  History  of  Money  aiid  Prices,  by  J.  Sehoenhof, 


POPULATION   IH   MILLIONS 


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Railways,  Telegraphs 
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Textile  Inventions 
Mechanical  Power 
Improvements  in  AgricjlLure 

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The  Black  Death 

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OCOCMOJCMMOJ*-—       •-•-- 

POPULATION   IN    MILLI0M3 


25 


26    CURRENT  ECONOMIC  PROBLEMS 

tendency  to  restrict  the  improvements  in  stand- 
ards of  living  that  might  otherwise  take  place, 
the  evidence  of  the  past  100  years  is  clear  that 
production  of  the  means  of  subsistence  has  in- 
creased in  much  greater  ratio  than  human 
numbers. 

A  more  serious  problem,  on  the  other  hand, 
was  that  arising  out  of  the  concentration  of 
workers  in  large  cities  and  their  entire  depen- 
dence upon  industrial  employment,  combined 
with  what  seemed  to  be  an  increasing  tendency 
toward  periodic  business  crises  with  accom- 
panying long  periods  of  unemployment  and 
distress. 

The  first  rapid  sweep  of  the  industrial  rev- 
olution may  be  said  to  have  ended  \vith  the 
nineteenth  century — leaving  these  and  other 
problems  unsolved.  It  brought  about  a  vast 
improvement  in  the  living  conditions  of  ordi- 
nary men.  It  gave  them  many  luxuries.  But 
it  left  them  with  a  feeling  of  helplessness  and 
insecurity  in  the  grip  of  an  economic  organiza- 
tion that  neither  they  nor  any  others  fully  un- 
derstood. And,  in  creating  comfort  for  the 
masses,  it  created  also  concentrations  of  wealth 
in  individual  hands  that  were  a  constant  chal- 
lenge to  the  justice  of  the  distribution  that 
was  taking  place. 


INDUSTRIAL  HISTORY  27 

THE   PRESENT   SITUATION 

Now,  in  these  early  years  of  the  twentieth 
century,  the  stage  seems  to  be  set  for  another 
great  act  in  the  drama  of  economic  evolution. 

As  the  first  act  came  the  pre-historic  and  his- 
toric struggle  of  man  for  the  simplest  necessi- 
ties of  existence — equipped  with  inadequate 
tools ;  lacking  the  resources  of  science  and  me- 
chanics ;  handicapped  by  imperfect  political  in- 
stitutions; oppressed  by  despotism;  harassed 
by  almost  continual  warfare;  and  periodically 
decimated  by  famine  and  pestilence. 

As  the  second  act  came  the  industrial  rev- 
olution— with  its  amazing  growth  in  the 
sciences  and  the  mechanical  arts;  with  un- 
dreamed of  increases  in  commerce  and  produc- 
tion; with  very  great  and  real  improvements 
in  the  material  and  political  conditions  of  the 
masses;  and  yet  mth  want  still  prevalent,  and 
with  even  the  best  informed  of  men  helpless 
to  control  the  new  forces  that  science  had  set 
loose  and  largely  ignorant  of  their  ultimate 
meanings  and  of  their  ultimate  reactions  upon 
human  life. 

And  today  the  scene  stands  ready  for  the 
further  unfolding  of  the  play  through  the  in- 
telligent harmonizing,  for  human  welfare,  of 
the  knowledge  that  the  years  have  given  and 
the  powers  that  the  years  have  brought  forth. 


28    CURRENT  ECONOMIC  PROBLEMS 

Political  freedom  we  have  in  this  country  in 
large  measure.  Education  is  T\ide-spread.  The 
forces  of  science  and  mechanics  are  being  sys- 
tematically developed  and  applied.  Forms  of 
political  and  industrial  organization  are  well 
established  and  their  limitations  are  known. 
Management  is  becoming  more  efficient,  and 
those  in  charge  of  large  enterprises  are  coming 
in  constantly  better  faith  to  recognize  their  ob- 
ligations to  employees,  to  the  public,  and  to  in- 
vestors alike,  as  trustees  of  great  social  instru- 
ments. 

These  are  foundations  upon  which  the  fu- 
ture may  be  built.  These  are  possessions  too 
great  to  be  carelessly  or  impatiently  sacrificed. 

It  is  true  that  with  all  these  agencies  at  hand 
for  the  satisfaction  of  human  needs,  there  is 
still  discontent.  It  is  true  that  recurring  cycles 
of  business  depression  bring  unemployment  and 
distress.  It  is  true  that  there  are  wastes  in  pro- 
duction and  wastes  in  distribution.  It  is  true 
that  there  are  questionable  inequalities  in  the 
distribution  of  wealth. 

Yet  with  all  the  faults  of  our  present  indus- 
trial organization,  the  fact  remains  that  it  is  a 
going  machine — powerful  beyond  any  that  man 
has  ever  before  developed  on  a  large  scale  to 
satisfy  his  needs,  and  flexible  enough  in  design 
to  adapt  itself  to  whatever  demands  the  fu- 
ture may  make  upon  it.  Adjustments  may  be 
needed  here,  a  drop  of  oil  there,  new  parts 


INDUSTRIAL  HISTORY  29 

in  still  another  place,  perhaps  even  a  gradual 
transformation — but  the  machine  as  a  whole 
must  be  preserved  in  continuous  and  certain 
operation. 

And  there  is,  furthermore,  one  great  out- 
standing difference  between  the  present  times 
and  the  past.  Until  very  recently,  economic 
laws  were  almost  wholly  a  matter  of  theory 
and  speculation,  and  for  this  reason  it  was  dif- 
ficult to  say  what  were  serious  and  what  were 
minor  defects  in  any  economic  plan.  But  now, 
to  a  large  degree,  we  can  measure  and  weigh 
and  give  a  value  to  each  factor  in  our  social 
and  industrial  organization. 

If  the  question  is  how  the  total  of  all  in- 
comes is  distributed  between  labor,  land  rents, 
interest  and  profits,  we  can  answer  ''approxi- 
mately 68%  to  labor,  8%  to  land  rents,  16%  to 
interest,  and  8%  to  profits  in  excess  of  a  nor- 
mal interest  rate." 

If  the  question  is  what  increase  might  the 
lower  jDaid  workers  receive  if  all  high  salaries 
were  reduced  to  $5,000  a  year,  we  can  answer 
"not  more  than  2%."* 

*Our  socialistic  critic  of  these  paragraphs,  in  speaking  of 
the  demand  for  a  fundamental  change  in  the  economic  system, 
says  that  this  demand  "is  not  primarily  concerned  in  the  re- 
duction of  high  salaries  based  on  service,  although  many  of 
these  salaries  could  probably  be  reduced  -without  injuring  the 
incentive."  He  says  further  that  such  demand  "is  con- 
cerned rather  with  the  elimination  of  property  income,  which 
accrues  from  mere  ownership,  and  with  the  elimination  of  great 
competitive  wastes. ' ' 


30    CURRENT  ECONOMIC  PROBLEMS 

Similarly,  if  questions  are  raised  as  to  the 
causes  of  business  cycles  and  the  possibility  of 
their  control,  as  to  the  effect  of  an  eight-  or  six- 
hour  day  on  wages  and  prices,  as  to  the  causes 
of  high  prices,  as  to  the  necessary  relations 
between  general  wages  and  the  cost  of  living, 
as  to  the  relation  of  interest  and  dividend  pay- 
ments to  wage  payments  in  typical  industries, 
or  as  to  scores  of  other  points  that  bear  directly 
and  indirectly  upon  the  living  conditions  and 
welfare  of  ordinary  men — to  all  of  these  ques- 
tions answers  can  be  given,  sujoported  by  de- 
tailed facts  that  are  wholly  or  in  large  part 
convincing  to  any  reasoning  man  who  will  ex- 
amine them. 

Many  of  these  questions  will  be  discussed  in 
succeeding  chapters  of  the  present  volume. 
For  present  purposes,  however,  the  significant 
point  is  that,  whatever  may  be  the  evils  and 
defects  in  our  present  industrial  system,  it  does 
not  give  to  men  of  great  wealth  more  than  a 
fraction  of  the  useful  goods  that  are  produced, 
and  the  great  balance  remaining  is  distributed 
with  reasonable  fairness  among  the  masses  of 
men  and  women — as  wages,  as  rents  on  small 
properties  they  own,  and  as  interest  and  divi- 
dends on  their  savings.  Furthermore,  of  the 
fraction  that  goes  to  the  wealthier  families, 
much  is  taken  by  the  Government  in  income 
and  inheritance  taxes,  while  other  large  sums 


INDUSTRIAL  HISTORY  31 

are  not  consumed,  but  are  reinvested  in  neces- 
sary productive  enterprises.* 

These  facts  are  far  from  justifying  a  ''stand 
pat"  attitude  in  respect  to  the  natural  and  in- 
evitable desire  of  every  American  for  improved 
living  conditions  for  himself  and  his  children; 
but  they  do  indicate  that  we  have  little  to  quar- 
rel about,  even  if  we  have  much  to  work  for. 
As  the  old  judge  pointed  out,  there  may  be 
both  proper  and  improper  reasons  for  starting 
a  feud.  Barn  burning  may  be  a  matter  for  pow- 
der and  shot,  but  a  raid  on  the  jam  closet  is  a 
matter  for  family  discipline. 

THE  PROBLEMS  OF  THE  FUTURE 

If,  then,  it  is  admitted  that  present  industrial 
conditions  do  not  justify  the  reckless  tearing 
down  of  all  that  we  now  have,  what  is  the  hope 

*Our  socialist  commentator,  who  does  not  criticize  this 
paragraph  as  a  whole,  is,  nevertheless,  not  willing  to  rely 
upon  inheritance  taxes  or  the  tendency  to  pass  "from  shirt- 
sleeves to  shirtsleeves  in  three  generations"  to  prevent  the 
maintaining  of  great  family  fortunes.  He  objects  less  to  the 
building  up  of  such  fortunes  by  "captains  of  industry"  than 
he  does  to  their  subsequent  control  by  less  capable  and  less 
useful  descendents  and  writes:  "This  condition  ***** 
is  both  unhealthy  and  unreasonable.  It  permits  many  sons  of 
the  rich,  without  any  effort  on  their  part,  to  live  in  idleness 
throughout  their  lives  and  yet  to  be  richer  at  the  end  of  their 
years  than  at  the  beginning.  Often  the  only  mental  energy 
that  they  need  expend  is  tlie  selection  of  an  efficient  trust 
company,  lawyer,  broker,  or  administrator  to  take  charge  of 
their  investments,  or  their  decision  to  retain  their  investment 
in   industries    selected    by   their   predecessors." 


32    CURRENT  ECONOMIC  PROBLEMS 

for  the  future?  How  may  the  conditions  of 
ordinary  men  be  improved?  How  may  their 
comforts  and  their  luxuries  be  increased?  How 
may  they  have  security  of  employment,  and  the 
feeling  that  they  are  something  more  than 
helpless  cogs  in  a  machine  over  which  they 
have  no  control? 

First,  the  real  facts  must  be  told,  fully  and 
exactly,  without  any  *'be  good  and  you'll  be 
happy"  platitudes,  and  with  a  very  clear  recog- 
nition that  fine  arguments  go  a  small  way  when 
it  is  a  question  of  shoes  for  the  children. 

For  the  public  utilities,  as  previously  stated, 
the  problem  is  well  defined — it  is  to  produce 
earnings  sufficient  to  enable  them  to  pay  the 
liberal  wages  for  money  and  the  liberal  wages 
for  men  and  women  that  are  equally  essential 
to  the  maintenance  and  extension  of  an  effi- 
cient service. 

This,  however,  is  only  one  part  of  the  story. 
Wages  are  simply  the  counters  with  which  the 
real  things  of  life  are  purchased.  The  ratio  of 
wages  to  prices  finally  determines  living  con- 
ditions, and  prices  are  determined  by  the  effi- 
ciency of  the  whole  industrial  organization,  of 
which  any  particular  industry  can  form  only  a 
small  part.  The  employees  of  any  single  in- 
dustry have,  therefore,  in  addition  to  a  pri- 
mary interest  in  their  own  wages  and  in  the 
success  of  their  own  business,  a  second  equally 


INDUSTRIAL  HISTORY  33 

vital  interest  in  the  operations  of  the  whole 
producing  and  distributing  organization  that 
supplies  them  with  the  tilings  they  consume. 

What,  then,  is  the  way  in  which  prices  may 
be  reduced?  How  may  the  efficiency  of  the  in- 
dustrial organization  be  increased? 

Lenin  and  Trotsky  in  Russia  believed  that  the 
answer  lay  in  overturning  the  whole  existing 
order  of  things.  They  preached  the  millennium 
— a  four-hour  working  day  and  luxuries  for 
everyone — as  the  result  of  proletariat  control. 
But,  if  the  press  reports  may  be  believed,  they 
have  wound  up  by  permitting  or  enforcing  work- 
ing days  of  from  eight  to  twelve  hours,  by  offer- 
ing high  salaries  to  competent  industrial  man- 
agers, and  by  going  out  into  the  markets  of  the 
world  in  an  attempt  to  borrow,  at  high  interest 
rates,  the  money  they  need  to  build  new  indus- 
trial plants. 

Some  philosopher  has  said  that  the  great 
art  of  pontics  lies  in  giving  new  and  attractive 
names  to  old  and  disagreeable  truths.  If  this 
is  so,  a  great  opportunity  lies  open  today  for 
some  new  master  of  words  to  gild  and  sugar- 
coat  the  old  copybook  maxims, — for  regardless 
of  what  soap-box  orators  may  say,  and  regard- 
less of  occasional  large  business  and  industrial 
profits,  the  hard  fact  remains  that,  in  the  long 
run,*  seventy-five  cents  out  of  every  dollar  we 

*Note:  This  figure  becomes  68  cents  out  of  each  dollar,  as 
indicated  on  page  29,  when  house  rents  and  other  items  of 
family  expenditure  are  averaged  with  purchases  of  commodities. 


34    CURRENT  ECONOMIC  PROBLEMS 

spend  for  commodities  represents  wages  paid. 
The  balance  represents  interest,  profits,  and 
land  rents.  There  are  ways  in  which  the 
charges  for  these  items  may  gradually  be  re- 
duced, and  some  of  these  methods  will  be  dis- 
cussed in  succeeding  chapters. 

But  the  major  item  is  wages.  Here  is  where 
the  great  gains  and  losses  may  be  made.  Here 
is  where  those  who  work  as  managers  and 
those  who  work  as  beginners  in  the  ranks  of 
industry  have  a  joint  responsibility.  Under 
free  competition,  if  wages  remain  fixed,  and 
production  increases,  prices  will  fall.  If  wages 
remain  fixed,  or  rise,  and  production  falls  off, 
prices  will  rise.  The  bricklayer  who  cuts  down 
the  number  of  bricks  he  lays  in  a  day,  raises 
the  rent  of  the  weaver's  house.  The  plough- 
man who  loafs  in  the  furrow  raises  the  price  of 
the  bricklayer's  bread.  And  the  weaver  who 
slows  the  loom  raises,  in  turn,  the  price  of  the 
ploughman's  coat. 

During  periods  of  unsettled  j^rices,  the  gen- 
eral levels  of  wages  and  prices  tend  to  rise  and 
fall  together,  although  not  wholly  in  unison. 
But,  in  settled  times,  wages  may  rise  as  the  re- 
ward for  individual  effort — while  a  fall  in 
prices  will  be  the  measure  of  collective  ejQS- 
ciency. 

Yet  the  whole  tale  is  not  to  be  told  in  terms 
of  direct  human  labor.    Business  organizations 


INDUSTRIAL  HISTORY  86 

must  be  improved.  Wasteful  processes  and 
methods  must  be  eliminated.  New  machines 
must  be  devised.  Business  depressions  must 
be  checked.  And,  above  all,  there  must  be  be- 
tween employer  and  employee,  between  indus- 
tries and  interests,  between  all  factions  and 
groups  of  men,  that  spirit  of  intelligent  adjust- 
ment and  compromise  which  Edmund  Burke 
so  well  described  in  his  great  speech  on  Con- 
ciliation with  America: — 

"All  government,  indeed  every  human  benefit  and 
enjoyment,  every  virtue,  and  every  prudent  act,  is 
founded  on  compromise  and  barter.  We  balance 
inconveniences ;  we  give  and  take ;  we  remit  some 
rights  that  we  may  enjoy  others;  and  we  choose 
rather  to  be  happy  citizens  than  subtle  disputants. 
As  we  must  give  away  some  natural  liberty,  to  enjoy 
civil  advantages,  so  we  must  sacrifice  some  civil  lib- 
erties, for  the  advantages  to  be  derived  from  the 
communion  and  fellowship  of  a  great  empire." 


CHAPTER  II 

SOCIAL  AND  INDUSTRIAL  ORGANIZATION 

THE    BASIC    VIEWPOINTS 

A  RECENT  writer*  has  revived,  in  very 
interesting  fashion,  an  old  discussion  sts 
to  whether  man,  as  we  know  him,  origi- 
nated from  animal  ancestors  of  a  solitary  or  of 
a  social  type.  He  argues,  rather  convincingly, 
from  evidences  of  language  and  primitive  cus- 
toms, that  the  ancestors  of  man  must  have  been 
highly  socialized  animals  living  much  like  the 
bee  and  the  ant,  and  that  the  solitary  man-like 
apes  were  not  the  progenitors  of  human  kind, 
but  represent  instead  merely  side  branches,  or 
outlaws,  from  the  evolutionary  tree. 

This  discussion,  aside  from  its  purely  scien- 
tific interest,  has  its  very  practical  aspects. 
We  shall  have  one  very  definite  attitude  toward 
present-day  political  evolution  if  we  believe 
that  society  is  developing  from  a  primitive  in- 
dividualism toward  a  highly  socialized  form; 
and  we  shall  have  quite  a  different  viewpoint  if 
we  see  in  human  evolution  a  steady  progression 
from  a  primitive  and  excessive  socialism  to- 
ward a  scientific  individualism  which  shall  com- 
bine a  large  measure  of  personal  freedom  of 

*The  Natural  History  of  the  State,  by  Henry  Jones  Ford. 
36 


ORGANIZATION— SOCIAL,  INDUSTRIAL    37 

initiative    wita    the    advantages    of    collective 
effort,  where  collective  effort  is  required. 

Although  these  two  viewpoints  are  funda- 
mental in  their  bearing  on  individual  liberty 
and  on  the  development  of  a  social  organization 
of  the  highest  effectiveness,  their  relationship 
to  our  current  economic  problems  is  indirect. 
The  purposes  of  human  organization  are  one 
thing.  The  forms  through  which  such  purposes 
may  be  accomplished  are  quite  another.  And 
in  these  days  of  hectic  emotions  and  tangled 
thinking,  when  the  world  shoots  first  and  rea- 
sons afterward,  there  is  great  danger  that  hu- 
man progress  may  be  retarded,  if  not  actually 
set  back,  by  failure  to  make  the  distinction 
clear  between  purposes  and  methods. 

THE  PURPOSES  OF  HUMAN  ORGANIZATION 

To  avoid  such  confusion  it  is  necessary  to 
reduce  to  simple  terms  the  demands  that  think- 
ing men  may  make  upon  the  social  and  indus- 
trial system.  Such  a  system  must  permit  each 
man  to  develop  his  own  freedom  and  his  own 
powers  to  the  utmost,  provided  only  he  does 
not  infringe  upon  the  equal  rights  of  his  neigh- 
bors. It  must  be  highly  and  continuously  pro- 
ductive of  the  things  that  satisfy  normal  and 
proper  human  desires.  And  it  must  secure  a 
just  apportionment  of  this  output  among  those 
that  contribute  to  its  creation. 


38    CURRENT  ECONOMIC  PROBLEMS 

These  demands  are  not  antagonistic.  It  is 
not  necessary  to  sacrifice  any  true  individual 
liberty  to  secure  social  ends.  Rather  may  social 
ends  he  served  by  stimulating  individual  pow- 
ers. It  is  not  necessary  to  tear  down  all  the 
tried  forms  of  human  association  and  organiza- 
tion, that  the  years  have  slowly  built  up,  in 
order  to  secure  the  productivity  that  our  needs 
require.  Rather  may  we  use  these  forms  as 
the  most  effective  agencies  in  such  production. 
It  is  not  necessary  to  deprive  capital  of  a  due 
reward,  or  savings  of  their  incentive,  in  order 
to  assure  a  just  recompense  to  labor.  Rather 
may  the  labor  of  today  gain  by  granting  freely 
to  the  stored-up  labor  of  j^esterday,  which  is 
capital,  that  fraction  of  the  increased  output 
from  new  industrial  processes  and  machinery 
which  is  necessary  to  stimulate  savings  and 
thereby  promote  business  enterprise. 

The  Industrial  Revolution  has  brought  spe- 
cial problems  and  difficulties  that  are  pressing 
for  solution — and  that  must  be  solved.  But 
these  problems  and  these  difficulties  are,  never- 
theless, only  a  few  among  many  that  humanity 
has  struggled  with  or  surmounted  in  the  past. 
Back  of  the  scant  one  hundred  years  during 
which  modern  industrial  developments  have 
dominated  human  activities,  lie  many  centuries 
of  continuous  struggle  for  individual  liberty. 
During  these  long  years  man  might  live  free 
as  a  nomad,  with  all  the  penalties  of  nomadic 


ORGANIZATION— SOCIAL,  INDUSTRIAL    39 

life.  But  if  he  chose  to  live  with  his  fellows,  in 
tribes  or  cities  or  organized  nations,  he  paid 
the  price  of  subjection  to  arbitrary  authority  in 
many  forms.  This  authority  might  be  that  of 
the  tribe  and  of  ironclad  tribal  customs.  It 
might  be  the  authority  of  the  church  and  of  an 
organized  priesthood.  It  might  be  the  author- 
ity of  kings,  or  of  military  despots.  But,  in 
whatever  form  it  came,  individual  liberty  was 
sacrificed  or  abridged. 

These  arbitrary  restrictions  of  individual 
liberty  were  not,  however,  in  all,  or  even  in 
most,  cases  fundamentally  blamable.  Society 
could  not  exist  without  authority.  Authority 
had  to  be.  But  men  had  not  learned  how  to 
temper  authority  with  the  necessary  restraints. 

This,  then,  was  the  great  problem  with  which 
humanity  had  struggled  for  centuries  before 
the  Industrial  Revolution  brought  its  new  and 
special  difficulties.  How  might  an  organized 
society  exist  without  the  abuse  of  power  and 
without  subservience  on  the  part  of  the  indi- 
vidual? 

THE  ORIGINS   OF  AMERICAN  GOVERNMENT 

The  culmination  of  this  long  struggle,  and 
the  greatest  single  step  forward  toward  the 
solution  of  this  century-old  problem,  came, 
perhaps,  with  the  American  Revolution  and  the 
establishment  of  our  present  form  of  govern- 
ment.    Here,  for  the  first  time  in  history,  a 


40    CURRENT  ECONOMIC  PROBLEMS 

great  people  founded  a  nation  upon  the  decla- 
ration that  there  were  certain  individual  rights 
that  must  be  preserved  and  upon  the  belief  that 
society  could  develop  to  its  fullest  effectiveness 
only  through  the  upbuilding  of  the  powers  and 
opportunities  of  the  individual. 

This  conception  of  government  was  well  ex- 
pressed* by  Thomas  Jefferson,  in  1816,  when 
he  said: 

"Our  legislators  are  not  sufficiently  apprized  of 
the  rightful  limits  of  their  power;  that  their  true 
office  is  to  declare  and  enforce  only  our  natural  rights 
and  duties,  and  to  take  none  of  them  from  us.  No 
man  has  a  natural  right  to  commit  aggression  on  the 
equal  rights  of  another,  and  this  is  all  from  which 
the  laws  ought  to  restrain  him ;  every  man  is  under 
the  natural  duty  of  contributing  to  the  necessities 
of  the  society,  and  this  is  all  the  laws  should  enforce 
on  him;  and,  no  man  having  the  natural  right  to  be 
the  judge  between  himself  and  another,  it  is  his 
natural  duty  to  submit  to  the  umpirage  of  an  impar- 
tial third.  When  the  laws  have  declared  and  en- 
forced all  this,  they  have  fulfilled  their  functions, 
and  the  idea  is  quite  unfounded  that  on  entering 
into  society  we  give  up  any  natural  right.  The  trial 
of  every  law  by  one  of  these  texts  would  lessen 
much  the  labors  of  our  legislators,  and  lighten 
equally  our  municipal  codes." 

This  viewpoint  was  clearly  that  of  other 
founders  of  our  government  besides  Jeiferson. 
Their  fear  was  as  great  of  the  tyranny  of  popu- 

*Vol.  Ill,  p.  3,  The  Writings  of  Thomas  Jefferson,  New 
York,    1859. 


ORGANIZATION— SOCIAL,  INDUSTRIAL    41 

lar  majorities  and  of  militant  minorities  as  it 
was  of  the  tyranny  of  princes  and  kings,  and 
this  fear  fomid  expression  in  the  familiar 
passage  from  the  Declaration  of  Independence : 
'^We  hold  these  truths  to  be  self-evident,  that 
all  men  are  created  equal,  that  they  are  en- 
dowed by  their  Creator  with  certain  inalienable 
rights,  that  among  these  are  life,  liberty  and 
the  pursuit  of  happiness.  That  to  secure  these 
rights  Governments  are  instituted  among  men, 
deriving  their  just  power  from  the  consent  of 
the  governed." 

THE   AUTOCRATIC   IDEA 

However,  in  opposition  to  the  individualistic 
development  of  the  American  Government, 
there  still  persists  in  some  quarters  a  belief  in 
highly  centralized  power.  The  two  signif- 
icant modern  examples  of  governments  or- 
ganized under  this  behef  are  both,  curiously 
enough,  of  German  origin,  one  being  the  pater- 
nalistic autocracy  of  the  pre-war  German 
state,  and  the  other  the  communistic  autocracy 
of  the  present  Bolshevist  Government,  which 
is  based  directly  upon  the  theories  of  Karl 
Marx.  In  the  one  case,  we  are  concerned  with 
a  state  organized  from  the  top  of  the  social 
ladder  and  founded  upon  the  idea  of  the  divine 
right  of  kings.  In  the  other  case,  we  have  an 
exactly  similar  conception  of  government,  with 


42    CURRENT  ECONOMIC  PROBLEMS 

the  single  difference  that  it  is  founded  upon  the 
idea  that  the  ruling  class  should  be  chosen  from 
the  very  bottom  of  the  social  ladder.  Yet  it  is  of 
little  consequence  which  social  group  controls 
the  govermnental  machine.  The  fundamental 
ideas  are  the  same.  Individual  initiative  and 
individual  liberty  are  destroyed,  and  the  only 
powers  remaining  are  those  of  autocratic  and, 
in  the  end,  narrow-minded  and  egotistical 
bureaucracies. 

One  of  the  major  causes  of  the  Great  War 
appears  to  have  been  the  conviction  of  the 
German  bureaucrats  that  they  had  developed 
so  perfect  a  plan  of  government  that  a  world 
that  could  not  perceive,  and  willingly  accept,  its 
beauties  and  its  advantages  deserved  to  be 
warred  upon  as  the  penalty  for  its  ignorance. 
Similarly,  it  is  one  of  the  basic  teachings  of  the 
radical  creed  that  communism  must  be  initiated 
by  establishing  the  most  rigid  kind  of  a  dicta- 
torship of  the  proletariat,  and  that  this  dicta- 
torship must  continue  until  human  nature  has 
been  remade,  if  necessary,  by  force,  and  the 
beauties  of  the  new  plan  are  generally  and  un- 
questioningly  accepted.  Neither  the  true  Bol- 
shevist nor  the  true  Prussian  can  ever  under- 
stand, or  hope  to  understand,  that  feeling  of 
men  educated  in  a  real  democracy  which  makes 
them  sincerely  prefer  to  be  shot  rather  than 
to    attain    perfection    under    autocratic    rule, 


ORGANIZATION— SOCIAL,  INDUSTRIAL    43 

whether  this  be  of  kings,  or  of  bureaucracies, 
or  of  proletariats.* 

THE    NEED    FOR    COMPROMISE 

As  has  pre^dously  been  noted,  the  essential 
purpose  of  our  o\\ni  government,  as  conceived 

*In  explanation  of  the  relation  between  the  teachings  of 
Karl  Marx  and  the  present  Eussian  communism,  our  socialistic 
critic  of  this  chapter  says : 

"Today  there  is  a  fundamental  cleavage  in  the  socialist 
and  communist  movements  as  to  the  relations  of  the  Marxian 
philosophy  to  Bolshevist  tactics.  On  the  one  hand,  such  Eus- 
sian leaders  as  Lenin  and  Trotsky  declare  that  their  tactics 
are  directly  in  line  with  those  advocated  by  Karl  Marx,  the 
father  of  so-called  scientific  socialism.  On  the  other  hand 
European  Marxists  such  as  Kautsky  and  such  American  so- 
cialists as  Morris  Hillquit  (see  "From  Marx  to  Lenin")  and 
Louis  B.  Boudin  contend  that  Bolshevism  is  inconsistent  with 
Marxism.  Marx,  they  claim,  held  that  socialism  was  not  pos- 
sible until  a  country  had  passed  through  a  stage  of  developed 
capitalism.  Eussia,  however,  had  hardly  entered  upon  that 
stage  at  the  time  of  the  November  revolution,  but  was  in  the 
lower  stages  of  agricultural  development.  These  Marxists, 
furthermore,  contend  that  Marx  thought  of  a  'proletarian 
dictatorship'  in  terms  of  a  government  representative  of  the 
'overwhelming  majority'  of  the  population.  Marxian  so- 
cialists have  generally  condemned  autocratic  control  of  in- 
dustry, and  have  declared  that  socialism  was  impossible  with- 
out democratic  management.  Tlie  Bolshevists  were  of  the 
opinion  that,  during  the  transition  period,  particularly  during 
a  period  of  civil  and  foreign  wars,  industrial  authority  should 
be  centralized.  They  did  not,  however,  advocate  this  as  a 
permanent  policy,  and,  since  1921,  have  done  much  to  de- 
centralize industrial  control.  The  control  originally  proposed 
was  a  control  by  the  most  intelligent  and  militant  minority  of 
the  industrial  population,  (according  to  Bolshe\'ik  concep- 
tions), rather  than  that  by  the  'slum  proletariat,'  and  much 
stress  was  at  times  placed  by  Lenin  and  others  on  the  im- 
portance of  the  technicians  to  the  industrial  machine.  They 
claimed  that  their  object  in  establishing  a  temporary  dictator- 
ship was  not  the  perpetuation  but  the  elimination  of  class 
rule. ' ' 


44    CURRENT  ECONOMIC  PROBLEMS 

by  its  founders,  is  to  protect  individual  rights 
and  individual  initiative.  And,  in  opposition  to 
this  concept,  the  German  idea  of  the  state, 
whether  in  imperialistic  or  communistic  form, 
tends  inevitably  toward  what  is,  at  the  best,  a 
paternalistic  despotism  of  strongly  organized 
and  intrenched  bureaucracies. 

Yet  no  mistake  could  be  greater  than  to  allow 
the  fear  of  radical  excesses  to  check  or  prevent 
wholly,  in  this  country,  that  natural  develop- 
ment of  cooperative  effort  which  should  take 
place — without  sacrifice  of  individual  liberties, 
mthout  destruction  of  individual  initiative,  and 
without  violence  to  fundamental  instincts  in 
human  nature. 

The  highly  individualistic  state  protects  in- 
dividual liberties  and  stimulates  individual 
energy;  and  it  is  itself  largely  protected 
against  great  errors  through  the  fact  that  its 
vitality  lies  in  the  many  voluntary  groupings 
of  its  citizens  for  industrial,  social  and  political 
purposes  and  its  growth  and  development 
come  out  of  the  consensus  of  the  experience  and 
the  thought  of  these  groups.  Yet  its  centralized 
governmental  agencies — its  representative  as- 
semblies— are,  almost  from  their  very  nature, 
incapable  of  successfully  directing  the  admin- 
istration of  large  public  or  semi-public  enter- 
prises. 

The  highly  socialistic  state,  on  the  other 
hand,  gains  power  of  administration  at  the  sac- 


ORGANIZATION— SOCIAL,  INDUSTRIAL    45 

rifice  of  individual  liberty  and  of  individual 
energy  and  initiative — while  at  the  same  time  it 
so  centralizes  its  thought  and  its  ^dtal  functions 
that  it  loses  all  independent  life  in  its  members, 
and  after  a  brief  display  of  abnormal  vigor 
may  decay  as  a  whole,  or  go  mad,  as  nations 
sometimes  "svill,  mthout  power  of  recuperation 
from  mthin. 

If  there  were  no  possibility  of  compromise 
between  these  two  extremes,  the  choice  would 
be  a  hard  one — on  the  one  hand,  individual  lib- 
erty and  individual  initiative,  but  combined 
with  these  an  inability  to  meet  the  growing  de- 
mands of  a  complex  civilization  for  administra- 
tive skill  in  public  and  semi-public  affairs — on 
the  other  hand,  a  centralization  of  govern- 
mental power  purchased  at  the  price  of  in- 
di\'idual  subservience  and  loss  of  energy,  and 
with  the  ever-present  danger  that  the  central- 
ized power  may  run  vd\d  without  balance  or 
control.* 

THE    POSSIBLE   ANSWER 

Between  the  advantages  and  disadvantages 
of  the  individualistic  and  socialistic  forms  of 
government  it  is  hardly  possible  that  a  simple 

*Our  socialistic  critic  objects  to  an  assumption  that  all  so- 
cialistic developments  necessarily  involve  a  bureaucratic  cen- 
tralization of  authority-     He  says: 

' '  Socialism  must  not  be  confused  with  communism  in  the 
sense  that  this  word  was  used  prior  to  the  Russian  revolution, 
nor  should  the  old  communism  be  confused  with  the  present 


46    CURRENT  ECONOMIC  PROBLEMS 

solution  may  be  found.  However,  a  hint  at  the 
ultimate  answer  may  lie  in  the  organization  of 
the  human  body.  Here  there  has  developed, 
through  long  centuries  of  evolution,  a  natural 

day  Eussian  communism.  Socialism  implies  a  system  of  so- 
ciety under  which  the  chief  industries  are  collectively  owned 
and  democratically  managed.  It  has  often  been  defined  as 
'the  public  ownership  and  democratic  management  of  the  so- 
cially necessary  means  of  production  and  distribution. '  Under 
the  system  of  socialism,  as  advocated  by  most  American  so- 
cialists, the  chief  and  controlling  industries  would  be  owned 
collectively  by  the  nation,  the  states  and  the  municipalities, 
and  managed  democratically  by  representatives  of  the  ad- 
ministrative officers,  the  rank  and  file  of  workers  and  the  com- 
munity-at-large.  Outside  of  the  publicly  owned  industries 
there  would  undoubtedly  be  a  considerable  number  of  in- 
dustries owned  by  voluntary  cooperative  groups  of  consumers 
and  producers,  particularly  in  intellectual  production  and  in 
agriculture,  and  a  certain  number  of  private  enterprises,  par- 
ticularly in  the  handicraft  industries.  Socialists  do  not  con- 
template under  social  ownership  the  bureaucratic  and  political 
control  found  today  in  most  governmental  industries.  The  so- 
cialist favors  the  retention  of  private  property  in  consumption 
goods. 

"In  primitive  times  a  certain  primitive  communism  was 
found,  under  which  not  only  capital  goods,  but  also  consump- 
tion goods,  were  owned  in  common.  Socialism,  as  technically 
understood,  was  impossible  prior  to  the  development  of  capital- 
ism, and  is  regarded  by  socialists  as  the  logical  next  step  fol- 
lowing developed  capitalism.  The  communism  in  Eussia  does 
not  advocate,  as  did  the  old  communism,  community  in  con- 
sumption goods.  The  schism  at  present  existing  between  the 
socialist  and  the  communist  forces  of  the  world  has  developed 
over  tactics  rather  than  ultimate  ideals.  The  Eussian  com- 
munism has  been  defined  as  'socialism  now.'  These  com- 
munists urge  that  social  ownership  be  ushered  in  by  a  small, 
militant  minority  of  the  industrial  workers,  operating  through 
a  soviet  form  of  government.  The  socialists,  on  the  other 
hand,  direct  their  efforts  to  the  conversion  of  the  majority  of 
the  population,  and  regard  independent  political  action,  trade 
and  industrial  unionism,  cooperation  and  education  as  the  four 
roads  leading  to  social  ownership. ' ' 


ORGANIZATION— SOCIAL,  INDUSTRIAL    47 

and  effective  balance  between  the  brain  and 
the  other  vital  organs.  The  brain  thinks,  rea- 
sons and  plans — but  although  it  is  faithfully 
served  by  the  other  vital  organs,  it  has  no  con- 
trol over  their  routine  operations.  Such  con- 
trol is  exercised  by  separate  special  brains  (or 
ganglia),  each  organized  and  equipped  for  its 
particular  function — and  the  more  important 
and  vital  this  function  is,  the  more  complete  is 
the  control  by  the  ganglion  in  charge,  and  the 
less  direct  is  control  by  the  central  brain.  The 
hand  may  lift  involuntarily  at  a  threatened 
blow,  or  may  be  raised  at  will ;  but  no  conscious 
effort  of  the  mind  can  stop  the  beat  of  the  heart. 
Yet  the  heart  would  be  less,  rather  than  more, 
truly  the  servant  of  the  whole  body  if  the  mind 
could  interfere  with  its  operations. 

So  in  the  ultimate  development  of  our  na- 
tional organization,  if  we  should  cling  too 
closely  to  an  extreme  individualism,  we  might 
be  in  the  position  of  a  man  whose  heart  beat 
according  to  its  own  fancy  without  regard  to 
the  real  demands  upon  it,  whose  lungs  filled 
and  emptied  with  no  regard  for  the  work  at 
hand,  and  whose  digestive  organs  furnished 
sustenance  or  not  as  they  felt  inclined.  In  the 
reverse  direction,  if  we  should  centralize  power 
over  the  vital  functions  of  trade  and  commerce 
and  industry  in  our  representative  assemblies, 
we  might  be  like  a  man  who  was  compelled  to 
order  each  heart  beat  and  each  breath  by  an 


48    CURRENT  ECONOMIC  PROBLEMS 

effort  of  the  will.  Between  these  two  extremes 
there  must  ultimately  be,  in  our  national  or- 
ganization, as  in  our  physical  bodies,  a  rational 
compromise. 

But  we  cannot  hope  to  realize  at  once  a  final 
perfection  in  our  national  organization.  In  our 
present  representative  assemblies — in  our  state 
legislatures  and  in  the  Federal  Congress — we 
have  the  conscious  centers  of  our  national  life, 
while  in  our  great  corporations  we  have  the 
beginnings,  and  in  some  cases  almost  the  fully 
developed  forms,  of  our  national  vital  organs 
and  their  associated  and  controlling  nerve  cen- 
ters. Both  are  adapted  to  their  special  pur- 
poses —  representative  assemblies  organized 
for  legislation,  and,  on  the  whole,  truly  respon- 
sive to  the  broader  currents  of  popular  thought, 
but  lacking  continuity  of  policy  and  incapable 
of  quick  decisions  in  emergencies — corpora- 
tions, on  the  other  hand,  organized  for  adminis- 
tration and  decision,  manned  by  specialists  of 
long  training,  and  planning  steadily  for  future 
growth  along  lines  of  well-established  policy. 

It  is  not  to  be  expected  that  we  could  have, 
today,  a  perfect  adjustment  and  adaptation  of 
these  agencies  to  our  national  needs.  When  our 
Government  was  established,  modern  indus- 
trial developments  were  just  beginning  to  take 
form,  and  the  time  that  has  since  elapsed  is 
but  a  single  swing  of  the  pendulum  as  time  is 
measured    in    the    broad    history    of    human 


ORGANIZATION— SOCIAL,  INDUSTRIAL    49 

affairs.  The  further  adjustments  cannot  take 
place  overnight,  but  must  come  by  successive 
small  steps,  guided  always  by  an  increasing 
knowledge  of  the  facts  and  by  that  spirit  of  true 
progress  which  seeks  always  to  save  the  things 
of  the  past  that  are  sound,  while  developing 
new  plans  for  the  future. 

Not  only  must  this  progress  come  gradually, 
but  there  must  also  be  a  clear  recognition  of 
the  infinite  gradations  in  the  character  of  the 
public  and  semi-public  services  to  be  per- 
formed. 

First  come  the  primary  functions  of  govern- 
ment itself — legislative,  judicial,  and  public 
safety;  then  come  public  education  and  certain 
basic  services,  such  as  those  of  sanitation, 
water  supply,  and  the  maintenance  of  high- 
ways, as  to  which  support  by  taxation,  in  whole 
or  in  part,  is  necessary  and  justified. 

Following  these  come  vital  public  utility 
services,  such  as  those  of  transportation  and 
communication,  and  the  furnishing  of  light  and 
power,  and  artificial  and  natural  gas,  all  of 
which  tend  to  take  on  the  character  of  natural 
monopolies,  but  which,  nevertheless,  should  be 
commercially  self-supporting. 

Next  in  order  comes  the  supph^  of  fuel,  food, 
and  certain  primary  articles  of  clothing.  Here 
public  interest  is  still  very  great,  although  the 
elements  of  natural  monopoly  are  lacking. 


60    CURRENT  ECONOMIC  PROBLEMS 

While  still  further  down  the  line  we  have 
the  supply  of  semi-necessaries  —  automobiles, 
watches,  etc.;  and,  finally,  at  the  end  of  the 
series,  comes  the  supply  of  pure  luxuries,  such 
as  jewelry  and  silks. 

THE   GRADATIONS    IN    REGULATION   AND    CONTROL 

With  a  range  of  activities  as  wide  as  that  just 
indicated,  it  is  obvious  that  no  single  method 
of  administration  can  properly  apply.  A  de- 
tailed discussion  of  all  of  the  gradations  that 
may  be  developed  between  complete  govern- 
ment o^vnership  and  operation,  through  vari- 
ous forms  of  modified  and  regulated  corporate 
control,  to  unrestricted  private  ownership,  is, 
however,  beyond  the  scope  of  this  volume.  Cer- 
tain definite  suggestions  may,  nevertheless,  be 
made  as  to  the  conditions  that  must  be  observed 
if  a  successful  development  of  our  national 
machinery  is  to  take  place.  Of  these  the  most 
important  relate  to  the  constructive  purposes 
that  may  be  served  by  private  capital  and  the 
individual  investor,  even  in  a  national  organi- 
zation that  aims  at  a  very  large  development 
of  collective  effort. 

First  of  all,  as  to  the  great  public  utilities, 
the  question  of  interest  and  dividend  charges, 
and  of  the  savings  that  might  be  made  in  this 
respect  under  complete  pubhc  ownership,  is  of 
very  minor  consequence — general  public  belief 
to  the  contrary  notwithstanding. 


ORGANIZATION— SOCIAL,  INDUSTRIAL    51 

If  the  Government  should  buy  the  railroads 
for  any  fair  sum  that  could  conceivably  be  paid, 
and  should  issue  its  own  bonds  for  the  pur- 
chase price,  the  maximum  annual  saving  that 
could  be  effected,  as  compared  with  the  present 
interest  and  dividend  payments  of  all  the  roads, 
would  be  less  than  2%  of  the  present  charges 
for  freight  and  passenger  service.  Further- 
more, nothing  in  past  experience  gives  any  as- 
surance that  this  small  saving  would  not  be 
much  more  than  offset  by  the  wastes  that  seem 
to  be  inseparable  from  governmental  operation 
of  complicated  enterprises. 

In  the  case  of  many  of  the  public  utiUties,  the 
existing  capitalizations  are  so  much  below  the 
real  present  values  of  the  physical  property 
that  similar  purchases  by  the  Government 
would  probably  necessitate  actual  increases  in 
rates  due  to  added  capital  charges  alone,  mth- 
out  regard  to  further  increases  that  might  be 
made  necessary  through  decreased  efficiency 
of  operation. 

Programs  for  the  development  of  collective 
effort,  whether  moderate  or  radical,  put  public 
utilities  first  in  order  of  consideration;  and  the 
special  significance  of  the  preceding  figures  is 
the  indication  they  afford  that,  whatever  this 
consideration  may  be,  the  question  of  capital 
ownership  is,  in  itself,  of  minor  importance, 
and  the  controlling  point  of  view  must  he  that 


52    CURRENT  ECONOMIC  PROBLEMS 

of  efficiency  of  operation  and  adequacy  of  ser- 
vice. 

Similar  conditions  exist  to  a  very  large  ex- 
tent in  connection  wdth  all  of  the  agencies  of 
production  and  distribution  to  which  it  has 
been  proposed  to  apply  a  program  of  collective 
control.  Out  of  the  32%  of  all  family  incomes 
that  is  derived  from  land  and  capital,  probably 
one-half  is  derived  from  rural  and  residential 
property,  leaving  only  16%  to  be  derived  from 
those  investments  in  public  utilities,  trade  and 
industry  that  are  most  frequently  the  objects 
of  socialistic  concern.* 

WHERE   THE   REAL  GAINS   MAY   BE   MADE 

This  comparative  unimportance  of  capital 
charges  in  the  fields  ordinarily  proposed  for 
the  initial  applications  of  collective  control  is 
not  generally  recognized.  OfiQcial  statistics  are 
frequently  quoted  for  groups  of  manufacturing 

*Our  socialistic  critic  objects  here  to  the  assumption  that 
the  only  saving  possible  under  socialization  is  the  difference 
between  the  interest  and  other  charges  on  corporation  securi- 
ties and  the  corresponding  charges  on  government  bonds.  He 
writes : 

"Socialists  agree  with  the  upholders  of  the  present  in- 
dustrial system  in  their  emphasis  on  the  need  of  capital  in 
the  form  of  machinery,  etc.,  and  realize  that  under  a  system 
where  capital  is  privately  owned  the  individual  capitalist  will 
demand  and  secure  a  part  of  the  social  product.  They  are, 
furthermore,  willing  to  admit  that  if  the  alternative  is,  on  the 
one  hand,  the  use  of  capital  and  the  payment  to  the  in- 
dividual for  that  use,  and,  on  the  other,  the  non-use  of  capital, 
the  former  procedure,  leading  as  it  does  to  greater  productivity. 


ORGANIZATION— SOCIAL,  INDUSTRIAL      53 

establishments  which  show  wage  payments 
amounting  to  only  a  third,  or  sometimes  only 
a  fifth,  of  the  total  value  of  the  product.  The 
usual  assumption  is  that  the  entire  difference 
between  wages  and  the  value  of  the  product 
represents  profits,  and  that  wages  could  be 
doubled  or  trebled  if  profits  were  eliminated. 

is  the  preferable-  Their  contention  is,  however,  that  the  own- 
ership of  capital  goods  should  gradually  be  transferred  to  the 
community;  that  social  investment  should  gradually  take  the 
place  of  individual  investment,  at  least  in  the  development  of 
large  scale  production;  and  that  the  income  which  now  goes 
to  individuals  in  the  form  of  rent,  interest  and  profit  should 
accrue  to  the  advantage  of  society-at-large  and  be  used  in  in- 
creasing the  return  to  the  nation's  producers,  in  improving 
the  economic  structure  and  in  enriching  the  intellectual  and 
aesthetic  life  of  the  people. 

' '  Income  from  the  ownership  of  property  will  thus  gradually 
be  eliminated  and  the  primary  source  of  income  for  all  groups 
in  the  community  with  the  exception  of  the  child,  the  old,  the 
sick,  etc.,  will  be  that  derived  from  intellectual  or  manual  ser- 
vice. The  socialists  believe  that  society  as  a  whole,  with  hun- 
dreds of  statisticians  at  its  command,  with  a  comprehensive 
knowledge  of  the  needs  of  the  community  and  with  the  ability 
to  coordinate  industrial  effort,  can  perform  the  function  of 
saving  and  investing  now  performed  by  the  individual  capital- 
ist more  economically  and  wisely  than  at  present.  Social 
ownership  and  investment  would  also  eliminate  the  necessity  of 
supporting  certain  groups  in  idleness. ' ' 

In  opposition  to  this  view,  there  is  a  growing  feeling,  among 
many  who  have  studied  the  problem  of  raising  new  capital  for 
business  enterprises,  that  such  capital  can  be  raised  in  any 
required  amounts  by  providing  means  whereby  the  average 
worker  may  safely  and  conveniently  invest  in  securities  rep- 
resenting the  country's  major  industries.  The  possibilities  in 
such  distribution  of  ownership  appear  to  be  almost  unlimited, 
and  there  is  a  very  real  question  whether  this  type  of  public 
ownership  may  not  combine  most  of  the  advantages  claimed 
for  the  socialistic  plan,  with  the  added  advantage  of  develop- 
ing the  traits  of  thrift  and  foresight  in  the  individual. 


54    CURRENT  ECONOMIC  PROBLEMS 

Yet  the  real  facts  are  that  the  difference  in 
question  represents  mainly  payments  for  raw 
materials,  coal,  power,  rent,  taxes,  etc.,  and 
that  profits  (including  interest  on  borrowed 
money)  are  usually  somewhat  less  than  one- 
third  of  payrolls. 

If  this  ratio  of  capital  return  to  wages  in 
industry  were  steadily  rising  there  might  be 
cause  for  concern.  But  the  reverse  appears  to 
be  the  case.  The  total  product  of  industry 
tends  to  rise  steadily  year  by  year  at  a  rate 
more  rapid  than  that  of  the  increase  in  popula- 
tion. The  shares  of  labor  and  capital  in  this 
product  are  both  increasing;  but  the  relative 
gain  on  the  part  of  labor  appears,  in  the  long 
run,  to  be  somewhat  more  rapid  than  that  of 
capital.  Much  of  this  gradual  gain  appears  to 
be  due  directly  to  the  more  efiScient  use  of  capi- 
tal and  to  the  lower  rates  of  return  necessary 
for  successful  financing  in  those  industries  that 
have  been  consolidated  and  reorganized  along 
lines  of  maximum  efficiency  of  operation. 

So  far,  then,  as  the  question  of  capital 
charges  in  production  and  distribution  is  con- 
cerned, the  average  man  may  reasonably  hope 
for  a  gradual  but  steady  improvement  in  his 
condition  as  the  result  of  the  natural  trend  to- 
ward greater  stability  of  investment  and  the 
more  efficient  use  of  capital  as  the  essential 
industries  become  more  efficiently  organized. 


ORGANIZATION— SOCIAL,  INDUSTRIAL      65 

However,  a  much  greater  possibility  for  gain 
exists  in  connection  with  the  opportunity  for 
reducing  the  multiplicity  of  styles  and  designs 
of  consumable  goods  that  are  advertised  and 
sold. 

Even  in  normal  times,  as  any  ordinary  arti- 
cle moves  from  the  factory,  through  the  jobber 
and  retailer  to  the  ultimate  consumer,  the  fac- 
tory price  about  doubles.  This  doubling  is  not 
due,  however,  as  is  commonly  believed,  to  high 
profits  on  the  capital  used  in  the  process  of  dis- 
tribution. About  three-quarters  of  the  addi- 
tions to  factory  prices  represent  actual  salaries 
and  wages  paid  to  employees  of  railways, 
trucking  concerns,  wholesale  establishments, 
retail  establishments,  etc.,  and  only  one-fourth 
of  the  additions,  in  the  average  case,  repre- 
sents profits  and  interest  on  capital  used.  The 
greater  portion  of  the  increase  in  prices  from 
the  factory  to  the  consumer  is  due  to  the  large 
stocks  that  must  be  carried,  to  the  time  re- 
quired by  the  salesman  to  induce  the  customer 
to  make  his  choice,  and  to  the  losses  that  result 
from  changes  in  styles  and  patterns. 

Further  very  large  savings  could  be  made 
in  the  factory  itself,  if  this  multitude  of  styles 
and  designs  could  be  simplified  to  some  reason- 
able extent.  As  to  many  classes  of  commodi- 
ties, these  savings  have  been  estimated  at  fully 
331-3%. 


56    CURRENT  ECONOMIC  PROBLEMS 

Action  along  these  lines  offers,  therefore, 
perhaps  the  greatest  single  opportunity  for  an 
increase  in  the  comforts  and  real  wages  of  the 
average  man;  but  it  is  very  doubtful  whether 
the  beginnings  can  be  made  by  legislation  or 
regulation.  If  there  is  popular  desire  to  effect 
these  savings,  the  public  will  first  have  to  edu- 
cate itself  to  the  value  of  simplification,  and 
as  the  next  step  there  must  come  a  certain 
amount  of  voluntary  effort  through  coopera- 
tive and  consumers'  associations.  Only  when 
these  preliminary  steps  have  been  taken,  and 
when  there  is  definite  evidence  of  a  general  de- 
sire on  the  part  of  the  public  to  avoid  extremes 
of  style  and  design  and  to  use  simplified  articles, 
will  it  be  practicable,  if  at  all,  to  supplement 
this  voluntary  action  by  legislation. 

THE    FINAL   PROBLEM 

Back  of  developments  similar  to  those  that 
have  just  been  discussed,  lies  the  primary 
problem  of  conserving  and  utilizing,  in  our  na- 
tional organization,  every  source  of  energy,  of 
growth,  and  of  progress  that  human  traits  can 
supply.  This  organization,  in  its  various 
parts,  must  take  many  forms.  But  whatever 
these  forms  may  be,  we  can  combine  with 
them  all  necessary  guarantees  for  human  wel- 
fare and  for  equity  in  the  distribution  of  the 
product. 


ORGANIZATION— SOCIAL,  INDUSTRIAL      57 

Energy  in  production,  furthermore,  does  not 
mean  the  over-driving  of  men  or  tools.  It 
means  skilled  and  stable  management,  fore- 
sighted  planning,  new  inventions,  and  new 
methods,  together  with  a  smooth  balance  and 
lubrication  of  the  whole  industrial  machine. 
And  if  this  energy  should  be  lost,  there  would 
be  small  comfort  for  the  worker  in  any  plan 
that  increased  his  relative  share  in  the  total 
output,  but  so  reduced  the  amount  of  that  out- 
put that  his  final  reward  was  less  than  before. 

Efficiency  of  administrative  organization 
can,  however,  only  be  secured  in  corporate 
form.  To  quote  the  author  of  the  so-called 
*' Plumb  plan" — *' There  has  never  yet  been 
devised  a  political  government  that  could  suc- 
cessfully administer  an  industry."  Yet  in  the 
development  of  these  special  corporate  forms, 
as  in  all  other  human  affairs,  it  mil  be  neces- 
sary to  avoid  extremes;  and  no  greater  mis- 
take could  be  made  than  to  eliminate,  or  even 
too  greatly  to  restrict,  the  influence  of  the 
investor. 

It  has  been  well  said  that,  of  all  the  elements 
contributing  to  industrial  activity,  there  is 
none  greater  or  more  valuable  and  construc- 
tive than  the  element  of  foresight — and  no 
method  of  securing  this  element  of  foresight 
has  ever  been  devised  except  that  of  permitting 
some  individual  to  put  hard-earned  dollars  into 
a  business  that  he  must  thereafter  nurse  and 
develop  and  watch. 


68    CURRENT  ECONOMIC  PROBLEMS 

Workers  come  and  go,  executives  change, 
consumers  shift  from  market  to  market,  what 
is  everybody's  business  is  nobody's  business — 
but  back  of  every  honestly  earned  dollar  in- 
vested in  legitimate  business  there  is,  per- 
manently and  for  all  time,  some  man  to  whom 
that  dollar  represents  hard  work,  self-denial 
and  provision  for  his  family  and  his  old  age. 
Society  cannot  afford  to  eliminate,  from  the 
management  of  its  great  affairs,  the  qualities 
that  these  things  represent.  It  would  be  as 
wise  to  tie  all  workers'  hands,  because  some 
hands  do  violence,  as  it  would  be  to  deny  to 
our  industrial  organization  the  services  of  the 
live  dollar  and  the  progressive  investor  because 
some  dollars  are  not  well  or  wisely  used. 

Here  lies  the  great  fallacy  in  the  extreme 
plans  for  social  change  that  are  now  proposed, 
and  just  as  it  may  be  only  fair  to  credit  the 
present  Russian  Government  vdth  altruistic 
motives,  so  also  would  it  be  fair  to  inscribe  on 
thousands  of  newly  erected  Russian  tombstones 
the  words — 

''Died  of  an  overdose  of  theories  and 
a  shortage  of  bread." 


CHAPTER  III 

PRODUCTION  AND  DISTRIBUTION 

THE  GOING  MACHINE 

THE  preceding  chapters  of  this  volume 
have  described  the  development  of  our 
present  social  and  industrial  organization 
from  its  crude  beginnings,  and  have  indicated 
the  forms  that  this  organization  may  assume, 
if  we  move  forward  along  sane  lines  and  avoid 
the  pitfalls  that  lie  at  both  extremes  of  eco- 
nomic and  political  theory. 

But  our  primary  interest  is  not  in  the  bare, 
cold  structure  of  the  economic  system.  Our 
much  more  real  concern  is  with  the  movements 
and  activities  of  the  whole  producing  and  dis- 
tributing mechanism  that,  in  the  end,  through 
its  efficiency  or  inefficiency  of  operation,  must 
largely  determine  our  individual  fortunes  and 
the  comfort,  or  lack  of  comfort,  with  which  we 
live.  We  may  be  mildly  interested  in  knowing 
what  the  1950  model  of  industrial  machine 
is  to  be,  but  it  is  of  downright  serious  im- 
portance to  have  a  full  gas  tank  and  oil 
reservoir  and  all  cylinders  firing  on  this  year's 
model.  Furthermore,  to  continue  the  parallel, 
we    are    not    half    so    much    concerned    with 

69 


60    CURRENT  ECONOMIC  PROBLEMS 

whether  the  machine  \sill  make  60  miles  an  hour 
on  a  level  stretch,  as  we  are  with  its  ability  to 
keep  going  uphill  and  doA\ailiill  at  an  ordinary 
road  speed  and  to  come  home  at  night  under 
its  0A\Ti  power. 

On  the  whole,  the  present  economic  machine 
does  reasonably  well  when  it  is  operating  with 
full  energy,  but  its  variations  in  speed — its 
periodical  partial  breakdo^\^ls — are  of  so  vital 
consequence  that  they  constitute  the  most  seri- 
ous of  immediate  problems. 

It  \vill  not  do,  however,  to  condemn  the  whole 
machine  because  of  a  dirty  spark  plug  or  a 
choked  gasoline  feed,  or  to  hammer  blindly  at 
the  mechanism  in  the  hope  that  a  chance  blow 
or  turn  of  the  wrench  will  remedy  the  difficulty. 
If  we  do  not  know  how  the  present  machine 
operates  and  how  to  adjust  it  and  keep  it  in 
good  running  order,  there  is  small  chance  that 
we  shall  do  better  with  another  machine  or  a 
new  model. 

Furthermore,  we  can  foresee  no  practicable 
changes  in  our  present  economic  organization 
that  can  seriously  alter  the  general  principles 
of  its  operation.  There  ^vi\\  always  be  buying 
and  selling.  Some  men  will  always  work  for 
wages,  while  others  will  take  risks  and  build  up 
new  enterprises.  Money,  in  some  form,  will 
always  be  used  as  a  common  measure  of  values ; 
and,  in  some  form,  there  will  always  be  borrow- 
ings and  lendings,  the  payment  of  interest  and 


PRODUCTION   AND   DISTRIBUTION         61 

rents,  and  the  expansion  and  contraction  of 
banking  credits.  With  this  fundamental  per- 
manency in  mechanism  assured,  how,  then,  does 
the  present  industrial  system  operate  and  what 
are  the  necessary  adjustments  that  should  be 
made  I 

THE  FLOW  OF  INCOME  AND  EXPENDITURE 

In  attempting  to  picture  the  round  flow  of 
production,  distribution,  and  consumption,  it  is 
helpful  to  separate  the  various  conditions  that 
may  exist  and  the  operations  that  may  take 
place. 

The  most  tangible  thing  with  which  we  can 
deal  in  the  economic  flow  is  the  fact  that,  dur- 
ing times  of  settled  business,  the  sum  of  all 
individual  incomes  is  always  substantially 
equal  to  the  sum  of  all  individual  expenditures. 

Expenditures  may  take  many  forms.  They 
may  cover  necessary  living  costs,  or  proper 
luxuries,  or  wasteful  extravagance.  They  may 
involve  the  accumulation  of  property  in  build- 
ings, or  in  the  stocks  and  bonds  which  repre- 
sent the  ownership  of  business  and  industrial 
enterprises.  Or  they  may  take  the  form  of 
bank  deposits  or  loans  to  individuals,  in  which 
case  the  expenditure  is  indirect  rather  than 
direct.  But  whether  saved  or  wasted,  or  spent 
for  necessary  living  costs,  practically  every 
dollar  of  income  received  goes  very  promptly 
back  again  into  circulation  and  in  turn  very 


62    CURRENT  ECONOMIC  PROBLEMS 

promptly  becomes  once  more  the  income   of 
some  individual. 

This  circulation  of  money  is  the  blood  flow  of 
the  economic  organization,  and  the  driving 
power  of  this  organization — its  heart  energy — 
is  the  desire  of  each  man  to  make  a  place  for 
himself  in  the  world  and  to  build  up  comfort 
for  himself  and  his  dependents. 

The  way  in  which  the  round  flow  of  money 
income  and  money  expenditure  takes  place  is 
illustrated  by  the  diagram  on  the  following 
page.  The  various  pipes  in  this  diagram  are 
drawn  only  in  approximate  proportion  to  the 
actual  money  flow,  and  many  details  are  neces- 
sarily omitted.  Nevertheless,  the  picture,  as  a 
whole,  gives  a  correct  general  idea  of  the  trans- 
actions that  take  place. 

At  the  top  of  the  diagram  the  total  of  all 
individual  incomes  flows  in  through  pipes 
representing  the  three  primary  factors  in 
all  productive  operations.  Personal  service, 
which  includes  salaries  and  wages,  with  an 
allowance  for  the  equivalent  wages  of  farm- 
ers, small  storekeepers  and  others  Avho  work 
for  themselves,  contributes  68%  of  the  total 
flow.  Return  on  capital,  which  includes  in- 
terest and  dividends  and  an  allowance  for 
money  invested  in  farm  machinery,  small 
shops,  etc.,  accounts  for  24%  of  the  total.  The 
balance  of  8%  represents  the  rent  of  urban  and 
rural  land  and  other  natural  resources. 


THE  ROUND  FLOW  OF  MONEY  INCOME  AMD  EXPENDITURE 


"V 


Income  Trom  Capital -Interest 


Dividends  and  Profits,  241 
Income  frcm 


Incomn  from  Personal  Service.  68t 


>B-RETaPL  ANil  WrlOLfeSALt  -r  - 
c;- DISTRIBUTION.  INCLUDING  .- 
TRANSPORTATION  AND  BANKING 


63 


64    CURRENT  ECONOMIC  PROBLEMS 

The  outflow  is  roughly  divided  according  to 
the  items  of  the  average  family  budget.  A 
small  part  becomes  individual  income  imme- 
diately through  payments  made  for  the  per- 
sonal services  of  servants,  tradesmen,  etc. 
But  the  greater  part  must  pass  through  one  or 
many  intermediate  stages  before  it  again  be- 
comes income  of  individuals. 

Hardly  a  purchase  or  expenditure  of  any 
kind  can  be  made  that  does  not,  in  the  end,  in- 
volve practically  the  whole  of  the  producing 
and  distributing  organization.  A  ten  dollar 
bill  paid  for  a  pair  of  shoes  means,  first  of  all, 
a  payment  tow^ard  the  salaries  of  shoe  sales- 
men. It  means  a  small  paj^ment  for  paper  and 
twine.  It  covers  a  fraction  of  the  shoe  dealer's 
expense  for  railroad  freights,  telephone  calls, 
electric  light,  and  advertising.  It  covers  in- 
terest and  rent,  as  well  as  recompense  to  the 
shoe  dealer  for  the  services  of  himself  and  his 
invested  capital. 

When  these  retail  charges  have  been  met, 
about  two-thirds  of  the  original  ten  dollars  is 
passed  along  to  the  wholesaler  and  manufac- 
turer ;  and  here  a  still  more  complicated  distri- 
bution takes  place.  Through  tanners  and  pack- 
ing houses,  a  portion  of  the  payment  goes  to 
the  western  cattle  country.  Cotton  mills  re- 
ceive payment  for  the  lining.  A  portion  of  the 
original  charge  goes  to  Japan  for  silk  thread 


PRODUCTION   AND   DISTRIBUTION         65 

and  to  Ireland  or  Belgium  for  flax.  Copper 
and  zinc  miners  receive  their  small  fractions 
for  the  eyelets  and  fasteners.  And,  in  the  end, 
a  score  of  countries,  a  thousand  industries,  and 
hundreds  of  thousands  of  human  beings  have 
made  their  contributions  to  the  finished  pair  of 
shoes  and  have  received  their  small  fractions  of 
the  price  paid. 

The  splitting  up  of  the  money  flow  into  a 
myriad  of  channels  does  not,  however,  alter  the 
essential  simplicity  of  the  operations.  Sooner 
or  later,  after  few  or  many  steps,  each  cent  and 
each  fraction  of  a  cent  must  appear  again  as 
some  person's  individual  income.  Even  the 
processes  of  international  trade  do  not  disturb 
this  round  flow.  The  sums  paid  to  Japanese 
silk  growers  for  silk  are  balanced,  in  the  long 
run,  by  reverse  payments  for  American  cotton, 
etc.,  so  that,  when  all  factors  have  been  con- 
sidered, the  cj^cle  may  be  conceived  to  begin 
and  end  in  a  single  country. 

MAKING  A  JOB  FOR  THE  NEW  WORKER 

A  very  important  point  in  connection  with 
the  round  flow  of  income  and  expenditure  is 
the  fact  that  each  man,  through  his  expendi- 
tures, creates  personal  income  for  others 
exactly  equal  to  the  amount  of  his  own.  It  is 
this  peculiarity  of  the  economic  flow  which  ex- 


66  CURRENT  ECONOMIC  PROBLEMS 

plains  the  way  in  which  new  workers,  whether 
native  born  or  immigrants,  are  absorbed  into 
industry. 

Each  day  in  the  United  States  there  is  a  net 
gain  of  over  2,000  new  workers — most  of  them 
native  born  young  men  and  women  newly 
grown  to  working  age.  No  matter  how  settled 
the  business  of  the  country  may  be,  there  are 
always  slight  variations  in  demand.  Some  in- 
dustries and  occupations  show  a  slight  short- 
age of  workers,  while  others  have  a  slight  sur- 
plus. The  occupations  that  are  sUghtly  over- 
supplied  are  usually  slow  to  lay  off  trained 
workers,  but  those  that  are  under-supplied  are 
quick  to  hire  the  newcomers  in  the  working 
field.  The  result  is  that  the  newcomers  are 
hired.  They  at  once  begin  to  spend  their  earn- 
ings and  thus  increase  the  demand  upon  the 
occupations  that  were  previously  over-manned 
— and  so  the  balance  is  restored,  and  full  em- 
ployment is  maintained,  not  only  for  the  new- 
comers, but  also  for  those  who  previously  were 
in  danger  of  being  laid  off. 

An  exactly  similar  operation  takes  place 
when  the  workers  available  are  not  newcomers, 
but  are  those  released  from  pre^dous  employ- 
ment by  the  introduction  of  automatic  ma- 
chinery or  other  improvements  in  processes 
and  methods.  If  the  number  of  workers  so  re- 
leased at  any  one  time  or  in  any  one  locality 
is  not  too  great,  they  are  absorbed  into  other 


PRODUCTION    AND    DISTRIBUTION       G7 

employments  in  the  same  manner  as  an  equal 
number  of  new  workers,  but  with  the  added 
advantage  to  all  workers  and  consumers  that 
the  prices  of  the  commodities  which  they  pre- 
viously were  engaged  in  producing  may,  and  in 
time  quite  certainly  will,  be  reduced  as  the  re- 
sult of  the  economies  effected. 

With  normal  business  activity  and  with  nat- 
ural resources  ample  for  a  growing  popula- 
tion, these  processes  may  continue  indefinitely. 
In  theory,  each  employer,  as  he  takes  on  new 
workers,  slightly  increases  his  borromngs  and 
thereby  increases  the  volume  of  money  in  cir- 
culation in  proportion  to  the  increase  in  his 
payrolls.  This  may  not  be  true  in  practice,  for 
individual  cases,  but  it  is  true  in  the  aggregate ; 
and  with  a  fixed  level  of  prices  the  volume  of 
bank  deposits  and  bank  loans  should  increase 
steadily  from  year  to  year  in  close  proportion 
to  the  increase  in  payrolls  and  in  the  total  of 
individual  incomes. 

THE    GROWTH    OF    INDUSTRIAL    MACHINERY 

With  this  steady  growth  in  business  and  in- 
dustrial activity  there  must  be,  for  continued 
progress,  an  even  more  rapid  growth  in  the 
machinery  of  industry. 

The  skilled  worker's  wage,  in  this  country, 
will  buy  today  over  three  times  as  much  wheat 


68    CURRENT  ECONOMIC  PROBLEMS 

flour  as  it  would  in  the  year  1855.  Yet  he  is 
hardly  more  capable  and  works  shorter  hours 
than  his  predecessor  of  two  generations  ago. 
The  difference  lies  almost  wholly  in  the  me- 
chanical and  scientific  developments  that  have 
taken  place — better  railways,  and  greater  rail- 
way mileage,  telephones  and  telegraphs,  im- 
proved agricultural  machinery,  and  new  indus- 
trial processes  of  a  thousand  kinds. 

Political  parties  may  come  and  go.  Theories 
of  reform  may  wax  and  wane.  But  day  by  day, 
in  thousands  of  laboratories,  in  the  minds  of 
thousands  of  inventors,  in  the  workshops  of 
thousands  of  mills  and  factories,  these  con- 
stant additions  to  human  productivity  go  on. 

Careful  studies  have  shown  that  in  the 
United  States  the  annual  production  of  useful 
goods  increases  with  remarkable  steadiness  at 
a  rate  between  3  and  4%  per  annum — while 
the  population  increases  at  the  rate  of  only  2%. 

High  interest  rates,  shortened  working 
hours,  and  the  losses  in  productive  efficiency 
that  have  come  as  the  aftermath  of  the  war, 
may  for  a  time  check  this  progress,  and  may 
retard  the  normal  steady  increase  in  real 
wages,  as  measured  by  purchasing  power. 
Increased  governmental  expenditures  mil  also 
have  their  influence.  In  spite  of  all  theories 
and  devices  to  the  contrary,  the  bulk  of  the 
burden  of  taxation  falls  in  the  end  upon  con- 


PRODUCTION   AND   DISTRIBUTION         69 

sumption,  and  shows  up  finally  in  higher  prices, 
higher  rents,  and  higher  cost  of  living.  Dur- 
ing periods  of  growing  taxation  increases  in 
real  wages  may  not,  therefore,  be  revealed  by 
the  usual  indices  of  purchasing  power.  These 
may  stand  still  or  decline,  while  the  added  na- 
tional productivity  is  absorbed  in  improved 
highways,  education,  and  sanitation,  in  en- 
larged national  armaments  and  military  ex- 
penditures, and  in  many  other  forms  of  pro- 
ductive and  unproductive  governmental  ac- 
tivity. 

Unrecognized  changes  in  the  character  of 
goods  and  services  are  a  further  factor  tending 
to  obscure  the  normal  increase  in  real  wages. 
The  quart  of  milk  which  is  Pasteurized  and  de- 
livered in  a  sanitary  glass  jar  is  not  the  same 
article  as  the  quart  of  milk,  plus  assorted  bac- 
teria, that  used  to  be  ladled  from  the  farmer's 
milk  can.  The  yeast  cake  ordered  by  telephone 
and  delivered  by  automobile  is  a  different  yeast 
cake  from  that  which  used  to  come  home  in  the 
housewife's  market  basket.  Housing  laws  have 
made  five  rooms  in  a  modern  tenement  a  dif- 
ferent thing  from  five  rooms  in  the  old-style 
rookery. 

Yet,  in  spite  of  all  these  influences  tending  to 
hold  back  both  actual  and  apparent  increases 
in  real  wages,  the  normal  annual  gain  in  pro- 
ductive efiiciency  is  so  great  that  it  must  re- 


70    CURRENT  ECONOMIC  PROBLEMS 

assert  itself  sooner  or  later  in  tangible  im- 
provements in  standards  of  living. 

Closely  related  to  this  steady  gain  in  human 
comfort  lies  the  often  debated,  but  fundamen- 
tally sound,  theory  that  labor,  under  conditions 
of  free  competition,  is  the  ** residuary  legatee" 
and,  as  such,  receives,  in  the  end,  all  the  gains 
from  new  machinery  except  a  living  wage  for 
the  new  capital  invested. 

The  basis  for  this  theory  is  simple.  Each 
manufacturer  in  a  competitive  field  who  puts  in 
a  new  machine,  or  introduces  a  new  process, 
does  so  because  he  expects  to  make  a  saving 
greater  than  the  interest  charges  on  his  added 
investment.  He  hopes  to  retain,  and  for  a  time 
may  retain,  the  entire  excess  as  his  own  added 
profit.  But,  in  the  end,  his  competitors  will 
imitate  him,  and,  when  this  imitation  takes 
place,  prices  will  be  reduced  to  a  point  where 
the  new  investment  earns  only  a  normal  rate  of 
return  and  the  balance  of  the  gain  is  passed 
along  to  the  consuming  public* 

The  most  vital  interest  of  the  ordinary 
worker,  and  of  every  consumer,  lies  in  main- 
taining this  steady  building  up  of  productive 

•This  theory  is  often  attacked  l)y  the  laV)or  unionist  and 
socialist  on  the  ground  that  a  large  portion  of  the  gain  from 
new  processes  and  machinery  is  absorbed  in  monopoly  profits. 
In  such  cases  it  is  claimed  that  "labor"  gets  the  "living 
wage" — or  less — and  that  capital  is  the  "residuary  legatee." 

Tt  would  be  very  dilTicult  to  determine  .just  Avhat  propor- 
tion of  the  total  national  income  is  absorbed  in  monopoly 
profits — but  it  is  hardly  probable  that  more  than  one-third  of 


PRODUCTION    AND   DISTRIBUTION         71 

macliinery.  It  happens  that  this  development 
has  taken  place  in  the  past  without  increasing 
the  relative  share  of  capital  in  the  output.  But 
it  is  of  comparatively  little  importance  what 
these  relative  shares  may  be,  provided  only  the 
purchasing  power  of  the  worker's  wages 
steadily  increases. 

Two  things,  in  particular,  are  necessary  for 
a  steady  increase  in  productive  industrial 
equipment.  There  must  be  general  confidence 
that  investments  once  made  will  be  protected 
and  will  be  allowed  a  ' '  living  wage, ' '  and  there 
must  be  a  continuous  large  volume  of  savings 
available  for  investment.  With  these  require- 
ments met,  interest  rates  will  be  low,  the  addi- 
tions to  industrial  equipment  will  be  large,  and 
the  increases  in  productivity  and  in  real  wages 
will  be  rapid. 

Before  the  war,  the  greater  part  of  large  in- 
dividual incomes  and  of  the  surplus  earnings 

the  output  of  the  highly  organized  industries  is  sold  at  a  monop- 
oly profit,  or  that  such  profits  represent  an  average  addition 
of  more  than  one-half  to  normal  competitive  profits.  On  this 
basis  monopoly  profits  in  the  highly  organized  industries  of 
the  United  States  at  the  outside  might  amount  to  one-seventh 
of  the  total  profits  in  such  industries,  or  to  about  2%  of  the 
national  income,  as  compared  with  the  68  to  70%  of  the 
national  income  which  is  paid  to  labor.  Unless  these  figures 
are  very  greatly  in  error,  or  the  percentage  of  monopoly  profit 
is  very  rapidly  increasing,  it  would  appear  that  the  theory  of 
labor  as  the  residuary  legatee  is  substantially  sound  for  con- 
ditions as  they  now  exist  in  the  United  States. 


72    CURRENT  ECONOMIC  PROBLEMS 

of  business  enterprises  was  regularly  rein- 
vested in  productive  machinery  and  equip- 
ment. Such  harm  as  there  may  have  been  in 
large  individual  and  corporate  incomes  lay  not 
in  the  incomes  themselves,  and  certainly  not  in 
their  reinvestment.  It  lay  only  in  occasional 
conspicuous  examples  of  monopoly  prices  and 
wasteful  living,  and  in  occasional  abuses  of  the 
power  which  large  incomes  and  large  fortunes 
created. 

Today,  mth  heavy  personal  taxes  amomit- 
ing  to  60%  of  the  larger  incomes,  and  with 
other  taxes  absorbing  a  large  portion  of  the 
surplus  earnings  of  business  enterprises,  the 
normal  flow  of  investment  money  is  diverted 
from  industry  and  passes  into  the  hands  of 
governmental  agencies.  From  such  agencies, 
a  part  may  be  returned  to  investors  through 
payments  of  interest  and  repayments  of  prin- 
cipal on  government  bonds,  but  a  much  greater 
part  ceases  to  be  available  for  investment  pur- 
poses. The  result  has  been  to  increase  greatly 
the  cost  of  raising  new  money  for  industry  and 
business,  and  to  raise  interest  rates,  in  the 
judgment  of  the  best  observers,  to  a  semi- 
permanent plane  from  1  to  2%  above  the  pre- 
war level.  This  not  only  transfers  back  to  the 
ultimate  consumer  in  higher  prices  much  of 
the  tax  originally  imposed  upon  individual  and 
corporate  incomes,  but  has  the  further  great 


PRODUCTION  AND   DISTRIBUTION         73 

disadvantage  that  it  tends  seriously  to  throttle 
normal  industrial  development.* 

Industrial  progress  and  the  welfare  of  every 
individual  demand  that  at  least  10%  of  our  na- 
tional effort  shall  be  expended  each  year  in 
new  buildings — residences,  offices  and  factories 
— in  added  public  utility  facilities,  in  added 
stocks  of  goods,  and  in  added  factory  equip- 
ment. This  need  is  a  primary  one,  and  no 
theory  of  government,  of  industrial  organiza- 
tion, or  of  taxation  is,  or  can  be,  sound  that 
does  not  provide  this  continuous  flow  of  new 
investment  or  that  increases  seriously  the  cost 
of  maintaining  it. 

If  certain  limbs  in  the  form  of  large  incomes 
are  to  be  lopped  off  or  pruned  from  our  eco- 
nomic tree,  it  is  quite  essential  to  be  sure  that 
we  are  not  sitting  on  these  limbs  before  we  be- 
gin to  wield  the  saw. 

THE   BUSINESS  CYCLE 

In  the  preceding  pages,  the  discussion  has 
been  confined  to  the  normal  flow  of  income  and 

*Our  socialistic  critic  says:  "If  the  money  thus  collected 
in  taxes  were  used  primarily  in  the  building  of  needed  public 
works,  in  the  development  of  industries  of  a  public  character, 
and  of  the  educational  and  artistic  resources  of  the  country, 
instead  of  for  military  purposes,  as  is  largely  the  case  at  pres- 
ent, such  taxation  would  be  a  boon,  not  a  hindrance  to  the  in- 
dustrial and  social  welfare  of  the  people.  If  investment  in 
harmful  and  comparatively  useless  commodities  was  eliminated, 
the  present  volume  of  investment  would  suffice  to  produce 
vastly  more  necessities  and  comforts  for  the  people  than  at 
present. ' ' 


74    CURRENT  ECONOMIC  PROBLEMS 

expenditure  and  to  the  underlying  steady  in- 
crease in  productive  efficiency  which  is  the 
most  hopeful  feature  of  our  economic  system. 
It  is,  however,  a  rare  thing  for  business  ac- 
tivity to  continue  at  any  given  level,  or  at  any 
steady  rate  of  increase,  for  a  long  period.  The 
volume  of  business  and  of  production  grows 
from  year  to  year,  not  steadily,  but  in  a  series 
of  spurts,  each  of  which  is  followed  by  a  check 
or  decline.  These  alternations  of  activity  and 
depression  constitute  what  is  known  as  the 
business  cycle. 

In  its  details  each  business  cycle  probably 
will  always  differ  from  every  other.  Yet  in 
certain  elements  practically  all  cycles  are  alike. 

If  we  begin  with  a  period  of  depression,  we 
find  merchants  reducing  stocks,  bank  loans  be- 
ing contracted,  the  weaker  and  less  efficient 
business  enterprises  forced  to  the  wall,  prices 
dropping,  and  much  labor  unemployed.  Con- 
struction activity  and  new  business  ventures 
are  also  at  a  low  ebb.  It  is  theoretically  pos- 
sible for  business  to  continue  at  this  low  level 
indefinitely.  Low  incomes  result  in  low  ex- 
penditures, and  low  expenditures  in  turn  make 
low  incomes. 

But,  in  practice,  there  are  several  things 
which  always  operate  to  bring  about  a  business 
revival.  A  certain  considerable  amount  of 
money  is  always  being  saved  by  thrifty  per- 


PRODUCTION   AND   DISTRIBUTION         75 

sons,  even  during  the  worst  of  a  business  de- 
pression, and  these  savings  create  a  growing 
pressure  for  an  outlet  in  new  enterprises  and 
business  expansion.  Much  construction  work 
that  has  been  checked  by  high  prices  during  the 
preceding  boom  is  always  awaiting  a  favorable 
moment — a  moment  of  low  prices  for  material, 
low  labor  costs,  and  low  interest  rates — for  a 
fresh  start.  Business  men,  generally,  are  al- 
ways estimating  price  trends  and  will  place 
orders  for  larger  supplies  of  goods  and  for 
longer  periods  the  moment  they  feel  that  the 
liquidation  is  complete  and  that  prices  are  due 
to  increase  rather  than  to  make  further  de- 
clines. 

Sooner  or  later,  therefore,  the  vicious  circle 
of  low  income  and  low  expenditure  is  broken. 
Bank  balances  are  drawn  upon,  new  loans  are 
made,  and  each  day's  expenditure  is  greater 
than  the  income  of  the  day  before. 

This  process  is  cumulative.  Merchants,  who 
have  delayed  their  purchases  until  they  find 
prices  on  the  up  grade,  buy  liberally  at  these 
higher  prices  to  avoid  paying  still  more.  The 
construction  work  begun  by  a  few  far  sighted 
investors  is  supplemented  by  perhaps  an 
even  larger  volume  of  construction — the 
building  of  new  telephone  lines,  the  buying  of 
new  railroad  cars,  and  the  extension  of  in- 
dustrial plants — arising  directly  out  of  the  in- 
creased business  activitv  itself. 


76    CURRENT  ECONOMIC  PROBLEMS 

All  of  these  operations  involve  a  greater  or 
lesser  recourse  to  the  banks  for  loans.  Bank 
reserves  begin  to  be  inadequate,  and  interest 
rates  rise. 

By  this  time,  prices  have  also  risen  very  con- 
siderably; labor  has  become  scarce  and  high 
priced,  and  labor  unrest  develops ;  the  efficiency 
of  the  individual  worker  falls;  the  cost  of  new 
construction  work  becomes  prohibitive  for  pur- 
poses of  long  term  investments ;  business  profits 
decline;  losses  increase;  and  a  general  feehng 
arises  that  the  boom  has  been  overdone  and 
that  a  reaction  is  at  hand.  This  stage  in  the 
business  cycle  is  usually  marked  by  a  break  in 
the  stock  market,  which  is  intensified  by  the 
specially  high  interest  rates  demanded  on  loans 
for  speculative  purposes. 

However,  the  existence  of  large  amounts  of 
uncompleted  construction  work  and  of 
heavy  unfilled  orders  at  factories  maintains 
business  activity  for  several  months  after  the 
slump  in  the  stock  market.  Construction  work 
then  begins  to  fall  off  rapidly.  Retail  mer- 
chants, seeing  poor  business  ahead,  reduce 
stocks  and  place  few  new  orders.  This  action 
falls  with  cumulative  effect  on  jobbers  and 
manufacturers.  Prices  fall  rapidly,  and  fail- 
ures and  unemployment  increase. 

Finally  when  this  rapid  downward  trend  has 
continued    for   perhaps    six    months,    banking 


PRODUCTION   AND   DISTRIBUTION         77 

conditions  gradually  improve,  interest  rates  de- 
cline, the  feeling  arises  once  more  that  a  favor- 
able time  is  at  hand  for  new  construction  work 
to  be  undertaken  and  for  long  term  contracts 
for  goods  and  supplies  to  be  made ;  and  the  cycle 
is  again  repeated.  This  whole  sequence  is  pic- 
tured graphically  in  the  chart  on  the  next 
page. 

CREDIT  EXPANSION"  AND  CONTRACTION 

Closely  tied  into  the  business  cycle  is  the 
question  of  increases  and  decreases  in  bank 
credits. 

In  the  days  before  modern  banking  facilities 
had  been  devised,  a  period  of  business  depres- 
sion was  also  a  period  when  actual  coin  was 
hoarded  up;  while,  in  the  reverse  direction,  a 
period  of  business  expansion  was  one  when 
hoarded  money  was  withdrawn  from  its  hiding 
places  and  put  into  circulation  through  loans 
to  or  investments  in  new  business  ventures. 

Today  actual  coin  plays  a  minor  part  in 
business  transactions.  About  85%  of  all  pay- 
ments are  made  by  checks  or  bank  drafts  and 
only  15%  are  made  in  bank  notes  or  other 
forms  of  currency.  The  real  money  of  present 
days  consists,  therefore,  mainly  of  demand 
deposits  in  banks.  These  deposits,  in  turn, 
represent  only  in  small  part  coin  or  currency 
paid  into  the  banks  by  depositors.  They 
represent,  in  the  main,  bank  checks  and  drafts 


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t.  Credit  strain  is  reduced. 

2.  The  volume  of  business  low. 

buying  for  immediate 
roquirements  only,  wages 
hill,  efficioncy  increases. 

3.  Prices  and  coal  of  domg 

busine^is  daciino. 

4.  Coit  of  construction 

declines. 

5.  Merchandise  slocks  reduced. 

shortage  of  both  produc*rs" 
and  consumers'  goods 
gradually  accumulates. 

6.  Credit  entanglements 

straighleiwd  out,  interest 
rates  continue  to  decline 

Normal 

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1.  Profits  decline. 

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prices,  buying 
restricted,  volume  of 
business  decreab«s. 

3.  Retrenchment  becomes 

general,  unemploiy- 
ment  grows. 

4.  Liquidation  spreads 

and  cumulates. 

5.  Prices  derllne  more 

rapidly 

6.  Credit  suain 

busmess  docreases. 
■^^.7.  Failures  tncrease. 

^^^  crJws  or  panic  follows. 

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1.  Labor  fully  employed  at  high  wages. 

2.  Efficienry  of  tabor  and  marugement 
decreases.. 

3.  Cost  of  doing  business  increases. 

4.  Selling  prices  increase^  but  not 
eriough  to  maintain  profit  margins. 

5.  Stocks   of   goods    become    Itirse    and 
markets  are  overbought. 

6.  Inve9«ment  nmstruction  falls  off. 

7.  Tension  in  the  money  market 

8.  Creditors  begin  to  press  for  payment 

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78 


PRODUCTION   AND   DISTRIBUTION         79 

which  have  been  turned  in  by  depositors  for 
collection. 

It  is  this  characteristic  of  bank  deposits 
which  explains  the  manner  in  which  deposits 
and  bank  loans  rise  and  fall  in  substantially 
equal  amounts.  A  bank  loan  is  almost  inva- 
riably deposited  to  the  borrower's  account  at 
the  bank  where  the  loan  is  made.  This  deposit 
is  then  withdrawn  through  checks  which  are 
mailed  to  creditors  of  the  original  borrower. 
These  creditors  in  turn  promptly  deposit  the 
checks  to  their  own  accounts,  so  that  any  loan 
made  at  a  bank  will  ordinarily  show  up  very 
promptly  in  bank  statements  as  an  equivalent 
increase  in  demand  deposits.  In  the  reverse 
direction,  reductions  in  outstanding  loans  are 
almost  invariably  made  by  means  of  checks 
dra"svn  against  demand  deposits,  which  there- 
fore show  a  decrease  corresponding  very  ex- 
actly to  the  decrease  in  outstanding  loans. 

THE  QUANTITY  THEORY  OF  MONEY 

As  a  result  of  these  relations,  the  volume  of 
money  in  circulation  (counting  both  checks  and 
currency  as  money)  is  very  closely  dependent 
on  the  volume  of  outstanding  bank  loans,  and 
an  increase  in  such  loans  has  an  effect  equiva- 
lent to  an  equal  increase  in  the  issues  of  bank 
notes. 


80    CURRENT  ECONOMIC  PROBLEMS 

The  quantity  theory  of  money  is  frequently 
EQisinterpreted.  When  reduced  to  its  simplest 
terms,  it  amounts  to  nothing  more  than  a  state- 
ment of  the  obvious  fact  that  the  sum  of  all 
payments  made  in  checks  and  currency  is  equal 
to  the  prices  of  the  goods  and  services  pur- 
chased, multiplied  by  the  corresponding  quanti- 
ties. The  debatable  point  in  the  theory  is  as 
to  whether  increases  in  prices  cause  increases 
in  the  volume  of  money  and  checks  in  circula- 
tion, or  vice  versa.  The  answer  seems  to  be 
that  either  tiling  may  happen.  A  sudden  war 
demand  for  commodities  may  raise  prices  and 
thus  compel  an  increase  in  bank  loans  and  cur- 
rency, or,  in  the  reverse  direction,  an  increase 
in  credit  facilities  at  a  more  rapid  rate  than 
the  increase  in  commodity  production,  may 
cause  prices  to  rise  until  a  balance  is  reestab- 
lished. 

In  general,  it  is  a  fact,  proven  by  experience, 
that  any  credit  facilities  that  are  available  will 
in  time  be  employed,  so  that  over  long  periods 
it  appears  to  be  true  that  price  levels  are  close- 
ly determined  by  the  ratio  of  legally  permissible 
bank  credits,  and,  therefore,  of  possible  checks 
and  money  in  circulation,  to  the  total  output 
of  goods  and  services. 

In  the  ordinary  business  cycle  the  relations 
of  bank  credits  and  of  money  circulation  to 
business  activity  and  the  general  price  and 
wage  levels  are  comparatively  simple.    When 


PRODUCTION   AND   DISTRIBUTION  81 

a  period  of  business  expansion  begins,  the  first 
signs  of  increasing  activity  are  increases  in 
purchases  by  retailers  and  jobbers,  increases 
in  bank  loans,  and  increases  in  money  circula- 
tion as  sho^vn  by  the  rise  in  ''bank  clearings" 
and  "debits  to  individual  accounts."  During 
the  early  stage  in  the  boom,  prices  rise  only 
moderately.  Much  labor  is  still  unemployed 
and  the  first  industrial  movement  is  to  put  this 
labor  back  at  work.  The  labor  turnover  is  low 
and  productive  efficiency  is  high.  The  output 
of  goods,  therefore,  increases  practically  in 
proportion  to  the  increase  in  money  circulation. 

This  process  continues  until,  finally,  there  is 
full  employment  for  labor  ^^'ith  prices  at  a 
normal  point,  and  with  manufacturing  and 
commercial  profits  on  a  high  plane,  owing  to 
the  fact  that  a  full  volume  of  business  is  being 
done  on  an  efficient  basis. 

If  the  business  cycle  could  be  held  at  this 
point,  much  would  be  gained.  Competition 
should,  and  vdth.  reasonable  public  regulation 
quite  surely  would,  hold  prices  and  business 
profits  at  a  reasonable  point.  Prices,  in  fact, 
should  decline  somewhat  as  the  result  of  the 
efficiencies  resulting  from  a  steady  output  at 
a  normal  rate;  while,  at  the  same  time,  the 
working  forces,  except  in  occupations  subject 
to  seasonal  variations,  would  have  sub- 
stantially continuous  employment  at  wage  rates 


82    CURRENT  ECONOMIC  PROBLEMS 

which  should  steadily  rise  in  purchasing  power 
at  the  rate  of  perhaps  1%  per  annum. 

Unfortunately,  however,  the  expansion  of 
business  does  not  stop  at  this  point.  Com- 
mitments for  supplies  of  goods  and  new  con- 
struction are  made  by  thousands  of  business 
men,  each  largely  ignorant  of  what  the  others 
are  doing.  These  commitments  involve  new 
bank  loans,  mth  corresponding  increases  in 
the  volume  of  money  in  circulation.  Employ- 
ment and  production  are  already  at  the  max- 
imum, mth  the  result  that  the  demand  for 
goods  and  labor  soon  exceeds  the  possible 
supply. 

At  this  point,  then,  there  is  an  attempt  by 
purchasers  to  buy  with,  say,  $1,100,  in  checks 
and  currency,  a  total  supply  of  goods  that  can- 
not exceed  $1,000  in  amount  at  the  old  values. 
The  immediate  result  is  that  prices  begin  to 
**sky  rocket,"  and  this  is  perhaps  the  first  sign 
of  the  approaching  business  depression.  The 
demand  for  workers  exceeds  the  supply.  Wage 
rates  rise  rapidly.  Workers  change  from  job 
to  job,  and  efficiency  is  thereby  greatly  lowered. 
Strikes  and  labor  unrest  increase,  and  even 
the  most  conscientious  of  workers  are  affected 
in  their  output  by  the  general  disturbance  of 
working  conditions. 

It  is  here,  as  previously  noted,  that  the  busi- 
ness cycle  turns  and  a  period  of  depression 
sets  in. 


PRODUCTION   AND   DISTRIBUTION  83 

Manufacturers  and  contractors  find  that  con- 
tracts, which  originally  promised  substantial 
profits,  threaten  now,  because  of  rising  costs 
of  labor  and  materials,  to  result  in  heavy  losses. 
Business  confidence  is  shaken,  credits  are 
closely  scrutinized,  the  further  expansion  of 
bank  loans  is  checked,  and  an  active  contrac- 
tion may  take  place. 

HOW   MAY  BUSINESS  DEPRESSIONS  BE  PREVENTED? 

When  a  business  depression  has  actually  be- 
gun, there  is  little  that  can  be  done  but  to  wait. 
The  preceding  period  of  credit  inflation  has  es- 
tablished false  and  impossible  price  standards. 
Business  cannot  go  forward  again  in  normal 
fashion  until  those  false  standards  are  torn 
down  and  true  values  are  reestablished. 

Every  wage  earner,  every  fanner,  every 
merchant  and  manufacturer  hopes  some  day  to 
beat  the  law  of  supply  and  demand.  In  times 
of  inflation  they  all  become  convinced  that  this 
law  has  finally  been  repealed,  and  that  the  glad 
time  has  come  when  each  man  may  set  his  own 
price  on  his  goods  and  his  services,  regardless 
of  what  the  buyer  may  think  or  say. 

When  the  inevitable  crisis  comes,  the  awak- 
ening is  a  hard  one.  Each  group  claims  that 
the  other  groups  should  deflate  first.  There  is 
much  futile  argument  back  and  forth.  But, 
in  the  end,  normal  price  and  wage  relations  are 


84    CURRENT  ECONOMIC  PROBLEMS 

once  more  established  anc!  business  activity 
returns. 

As  with  typhoid  fever,  so  with  business  de- 
pressions, the  only  real  cure  lies  in  prevention. 
But  the  prevention  is  not  simple.  The  only 
workable  remedy  appears  to  lie  in  a  control 
and  restriction  of  banking  credits,  at  the  point 
where  proper  business  activity  begins  to  run 
mid  into  inflation.  Whether  this  control  should 
be  exercised  wholly  through  the  interest  rates 
charged,  or  should  take  other  forms,  is  an  un- 
settled question.  Furthermore,  it  is  obvious 
that  action  in  one  country  alone  cannot  be 
wholly  effective  in  view  of  the  ease  with  which 
investment  money  moves  from  country  to 
country  in  response  to  variations  in  interest 
rates. 

Yet,  with  all  these  difficulties  in  the  way,  the 
problem  must  be  solved,  for  only  when  it  has 
been  solved  will  it  be  possible  to  secure  that 
confidence  in  the  foundations  of  our  present 
economic  structure  which  is  neccessary  before 
we  can  build  it  to  greater  usefulness. 

And  this  matter  of  confidence  must  go  fur- 
ther than  a  mere  belief  in  principles  of  gov- 
ernment. It  must  be  built  into  the  structure 
of  every  business  and  personal  relationship. 
It  must  primarily  be  between  man  and  man. 

It  would  be  small  wonder  if  such  confidence 
were  lacking  today  in  a  world  that  has  rapidly 
alternated  between  military  discipline  and  com- 


PRODUCTION   AND   DISTRIBUTION  86 

munism,  and  between  war  wages  and  no  jobs 
at  all.  But  only  when  this  man-to-man  con- 
fidence is  restored  can  we  have  a  clear  recog- 
nition of  the  fundamental  facts  which  underlie 
all  our  problems  of  production  and  distribu- 
tion. 

1.  That  all  material  welfare  depends 
upon  high  productivity. 

2.  That  our  present  industrial  system  in 
the  United  States  is  the  most  efficient  that 
the  world  has  ever  known. 

3.  That  a  ten-year  normal  increase  in  per 
capita  production  under  our  present  system 
represents  a  greater  gain  for  the  worker 
than  any  that  is  possible  as  the  result  of  any 
conceivable  redistribution  of  profits. 

4.  That  this  normal  increase  in  produc- 
tion can  only  go  forward  with  ample  invest- 
ments in  new  productive  equipment  and  with 
the  assurance  of  a  living  wage  for  such  in- 
vestments. 


CHAPTER  IV 

SOME   PERTINENT  STATISTICS 

STATISTICS   VERSUS   "tHE  STATISTIC" 

MERE  bulk  statistics  on  any  subject  have, 
to  the  ordinary  man,  all  the  cheeriness 
and  practical  value  of  a  night  fog  on 
the  North  Sea.  What  he  is  looking  for  is  the 
statistic — a  statistical  lighthouse  by  which  he 
may  steer  a  course  and  reach  an  anchorage. 

When,  therefore,  we  seek  to  summarize  the 
statistical  evidence  that  lies  back  of  the  points 
of  idew  previously  presented  in  this  volume, 
it  will  not  do  to  submit  long  tables  of  figures 
or  lengthy  references  to  the  census  reports. 
The  first  necessity  is  to  state  clearly  the  prob- 
lems involved,  and  the  second  is  to  associate 
with  each  problem  the  statistic  which  is  most 
pertinent. 

In  some  instances  it  will  be  found  that  there 
are  no  pertinent  statistics;  in  others  we  may 
find  an  acceptable  substitute  for  statistical 
evidence  in  simple  lines  of  reasoning  from  com- 
mon human  experience;  but  in  every  case,  if 
we  are  seeking  to  base  our  conclusions  upon 
facts  and  dependable  logic,  rather  than  upon 

86 


SOME  PERTINENT  STATISTICS  87 

opinion  and  prejudice,  the  least  that  we  can 
do  is  to  set  up  our  problems  in  logical  order 
side  by  side  with  the  facts  and  lines  of  reason- 
ing that  apply. 

Much,  however,  will  depend  upon  the  way  in 
which  we  state  the  questions  to  which  we  wish 
statistical  answers.  The  simpler  and  more  defi- 
nite each  question  can  be  made,  the  greater 
is  the  possibility  of  finding  a  simple  and  con- 
vincing answer  and  the  less  is  the  chance  of  be- 
ing lost  in  a  fog  of  figures  and  arguments. 

THE   QUESTIONS   TO   BE  ANSWERED 

From  a  practical  standpoint  we  are  not 
directly  concerned  with  whether  we  should  have 
a  socialistic  or  an  individualistic  government, 
or  a  compromise  between  the  two.  Mere  names 
are  of  little  account.  Governments,  and  indus- 
trial and  social  organizations,  based  upon 
hereditary  rights  and  privileges,  obviously  be- 
long to  a  primitive  stage  in  human  history,  and 
are  not  to  be  considered  for  the  future.  But  be- 
yond this  we  are  only  confusing  the  issue  w^hen 
we  talk  in  terms  of  republics  and  democracies, 
or  of  individualism,  socialism,  and  communism. 

Men  are  what  they  are  because  of  long  cen- 
turies of  evolution  and  human  experience. 
They  have  certain  instinctive  desires,  habits, 
and  points  of  view,  which  can  change  only 
slowly  from  generation  to  generation.     Our 


88    CURRENT  ECONOMIC  PROBLEMS 

future  problem  is  not  that  of  setting  up  a 
theoretically  perfect  economic  plan,  and  of  say- 
ing that  men  shall  then  adapt  themselves  to  it. 
It  is  very  certainly  the  opposite — that  of  study- 
ing the  habits  and  instincts  of  human  beings  as 
they  are,  and  of  developing  forms  of  political, 
social,  and  industrial  organization  which  will 
operate  most  effectively  in  relation  to  such 
habits   and  instincts. 

If  we  wish  to  risk  a  generalization  w^e  may 
put  it  in  paradoxical  form  by  sajdng  that  our 
economic  system,  under  any  sound  develop- 
ment, will  become  more  socialistic  in  the  sense 
that  we  shall  cooperate  more  effectively  and 
recognize  the  public  interest  more  fully  with 
respect  to  many  of  our  affairs,  while  at  the 
same  time  we  shall  become  increasingly  in- 
dividualistic in  the  sense  that  we  shall  more 
rigidly  restrict  our  basic  governmental  ma- 
chinery to  the  primary  functions  of  govern- 
ment.* 

Whatever  these  developments  may  be,  we 
do  not  need  the  recent  failure   of  the   great 

*One  of  the  most  serious  dangers  from  the  writer 's  stand- 
point is  that  the  pressure  for  necessary  and  proper  develop- 
ments of  governmental  activity  may  lead  to  mistakes  that  may 
be  difficult,  if  not  impossible,  to  remedy.  Not  only  may 
direct  governmental  authority  be  extended  over  undertakings 
which  should  be  subject,  at  the  most,  to  a  reasonable  regulation, 
but  the  tendency  may  be  to  impose  the  burdens  of  manage- 
ment, even  as  to  proper  undertakings,  upon  existing  political 
machinCTy  which,  from  its  very  nature,  is  incapable  of  ad- 
ministering affairs  requiring  systematic  planning  and  continuity 


SOME   PERTINENT  STATISTICS  89 

economic  experiment  in  Russia  to  tell  us  that 
our  future  economic  development  must  come 
gradually,  step  by  step,  out  of  the  system  we 
now  have.  On  this  basis,  then,  we  may  ask 
a  series  of  questions  to  test  the  strength  and 
the  weakness  of  our  present  economic  organi- 
zation and  to  indicate  in  some  measure  the 
possibilities  of  improvement: 

1.  What  is  the  trend  of  per  capita  physical 
production  ? 

of  policy.  A  further  great  danger  is  that,  under  the  forms  of 
governmental  operation  now  in  vogue,  there  may  grow  up 
great  bodies  of  public  employees  who  may  be  tempted,  if  not 
compelled,  to  bring  concerted  and,  in  the  end,  very  harmful 
political  pressure  upon  public  officers  and  legislative  bodies. 

Our  socialistic  critic,  while  sharing  some  of  the  writer's 
fears  as  to  political  and  bureaucratic  management,  still  hopes 
for  a  rapid  increase  in  socialized  control  and  advocates  the 
development  of  special  forms  of  administrative  organization 
as  successors  to  those  forms  set  up  by  "developed  capitalism." 
After  referring  to  the  extent  to  which  railroads  and  other 
public  utilities,  banking,  forests,  etc.,  have  already  come  under 
state  control,  he  quotes  from  "State  and  Municipal  Enter- 
prise, ' '  as   follows  : 

"  'Even  if  no  more  were  accomplished  within  the  next  thirty 
years  than  in  bringing  under  the  public  administration  in  all 
countries  of  the  civilized  world,  those  industries  and  services 
which  are  today  governmentally  administered  in  one  or  other 
of  the  countries, '  declares  the  Fabian  Bureau,  '  the  aggregate 
volume  of  state  and  municipal  capital  and  employment  would 
be  increased  five  or  six  fold. '  Such  an  increase,  without  adding 
a  single  fresh  industry  or  service  to  those  already  successfully 
nationalized  or  municipalized  in  one  country  or  another,  would 
probably  bring  into  the  direct  employment  of  the  national  or 
local  government  an  actual  majority  of  the  adult  population; 
and  along  with  the  parallel  expansion  of  the  cooperative  or 
voluntary  association  of  consumers  in  their  own  sphere,  would 
mean  that  probably  three-fourths  of  all  the  world's  industrial 
capital  would  be  under  eoUectiTist  or  non-capitalist  adminis- 
tration. ' ' 


90    CURRENT  ECONOMIC  PROBLEMS 

2.  What  is  the  trend  of  real  wages? 

3.  How  is  the  national  income  distributed 
among  individuals,  and  is  income  tending  to 
become  more  or  less  concentrated  in  a  few 
hands? 

4.  How  is  the  national  income  distributed 
to  labor  (personal  service),  capital,  and  the 
owners  of  natural  resources?  What  is  the 
trend  of  such  distribution? 

5.  What  are  the  practicable  possibilities  with 
respect  to  securing  a  more  uniform  distribu- 
tion of  income  among  individuals? 

6.  What  are  the  practicable  possibilities  with 
respect  to  increasing  the  share  of  *' labor"  in 
the  total  product? 

7.  What  is  the  e\ddence  as  to  waste  and  de- 
fects in  our  present  economic  system,  and  as  to 
possible  improvements? 

THE   INCREASE   IN   PHYSICAL   PRODUCTION 

To  the  first  of  the  preceding  questions,  the 
statistical  answers  are  specially  complete.  In- 
dependent studies  have  been  made  by  E.  E. 
Day  of  Harvard,  W.  W.  Stewart  of  Amherst, 
Carl  Snyder  of  the  Federal  Reserve  Bank  of 
New  York,  and  W.  I.  King,  for  varying  periods 
from  1870  to  date,  all  of  which  studies  indicate 
an  average  annual  increase  of  between  3%  and 


SOME  PERTINENT  STATISTICS  91 

4%  in  the  volume  of  essential  commodities  pro- 
duced in  the  United  States.  These  studies  have 
recently  been  supplemented  and  corroborated 
by  studies*  of  the  National  Bureau  of  Eco- 
nomic Research  with  respect  to  the  purchasing 
power  of  the  national  income.  The  results  of 
these  various  investigations  are  shown  in  graph- 
ical form,  on  the  chart  which  follows,  in  com- 
parison with  a  line  representing  the  increase 
in  population.  In  each  case  the  population  or 
physical  production  in  the  year  1913  has  been 
taken  as  100  and  the  figures  for  other  years 
have  been  plotted  with  relation  to  this  base. 

Roughly  speaking,  it  appears  from  these 
studies  that  the  physical  volume  of  production 
nearly  trebled  from  1880  to  1919,  while  popu- 
lation only  a  little  more  than  doubled.  On  a 
per  capita  basis  this  corresponds  to  an  increase 
in  physical  production  of  somewhat  more  than 
one-third  during  the  years  involved.  The 
bulk  of  this  increase  came  in  the  period  from 
1894  to  1919,  during  which  time  per  capita  pro- 
duction increased  at  a  rate  somewhat  in  excess 
of  1%  per  annum. 


*See  pages  79  and  80,  Income  in  the  United  States,  National 
Bureau  of  Economic  Eesearch,  Inc.,  474  West  24th  Street,  New 
York  City,  for  the  results  of  these  studies  and  for  detailed 
references  to  the  other  investigations  mentioned.  A  recent  re- 
vision of  Mr.  Snyder's  index  is,  however,  shown  on  the  chart 
here  presented. 


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92 


SOME  PERTINENT  STATISTICS  93 

THE  INCREASE  IN  REAL  WAGES 

With  this  steady  and  substantial  increase  in 
per  capita  physical  production,  it  is  to  be  ex- 
pected that  real  wages  would  increase,  in  spite 
of  moderate  changes  that  might  take  place  in 
the  distribution  of  the  national  income  among 
individuals  and  among  the  factors  in  produc- 
tion— i.  e.,  to  labor  (personal  service),  capital, 
and  the  owners  of  natural  resources. 

Such  increases,  as  indicated  by  the  increase 
in  per  capita  production,  should  be  at  the  rate 
of  approximately  1%  per  annum.  This  rate 
of  increase  is  not  great  enough,  however,  to 
prevent  the  long  term  trend  from  being  ob- 
scured from  time  to  time  by  changes  in  price 
levels  and  by  economic  adjustments  among 
occupations.  These  latter  adjustments  during 
one  period  of  years  may  cause  most  of  the 
general  gain  in  productivity  to  accrue  to  far- 
mers and  agricultural  workers,  or  to  relatively 
unskilled  workers,  while  during  other  periods 
they  may  work  in  the  reverse  direction  to  the 
advantage  of  miners  or  factory  workers  or 
clerical  employees,  or  specially  skilled  oc- 
cupations. For  this  reason,  and  because  of  the 
difficulty  in  establishing  proper  general  in- 
dices of  prices,  wages,  and  cost  of  living,  there 
arises  the  belief,  ever  so  often,  that  the  pur- 
chasing power  of  wages  is  steadily  declining; 
and  it  is  often  possible,  by  selecting  special 
cases  for  investigation,  to  collect  figures  which 


94    CURRENT  ECONOMIC  PROBLEMS 

show  that  such  a  decline  has  taken  place,  tem- 
porarily at  least,  in  some  particular  occupation 
or  in  some  particular  locality. 

Our  major  concern  is,  however,  mth  the  long 
term  trend  of  wages  as  a  whole,  and,  as  to 
this,  there  is,  during  the  past  50  or  60  years, 
evidence  of  a  reasonably  continuous  increase 
such  as  might  be  expected  from  the  increase 
in  per  capita  producti\dty.  The  first  of  the  two 
charts  which  follow  is  based  upon  what  are 
believed  to  be  the  best  indices  of  hourly  wages 
and  prices*  available  from  jort  to  year  during 
the  period  indicated. 

It  is  necessary  to  note  on  this  first  chart  that 
there  is,  in  general,  a  tendency  for  real  wages 
to  increase  slowly  or  even  decline  during  the 
early  stages  of  a  business  revival,  and  to  rise 
at  an  abnormal  rate  during  the  later  stages  of 
the  business  cycle.  This  is  due  to  the  tendency 
for  wage  rates  both  to  rise  and  to  fall  more 
slowly  than  prices,  and  is  largely  independent 
of  the  long  term  trend  in  real  wages.f 

*Wholesale  rather  than  retail  prices  are  uaed  owing  to  the 
difficulty  in  securing  any  satisfactory  general  indices  of  retail 
prices.  Wholesale  prices  fluctuate  more  than  retail  prices,  but 
over  long  periods  their  trend  is  substantially  the  same. 

tin  estimating  the  long  term  trend  of  real  wages  it  is  neces- 
sary to  disregard  periods  of  rapid  price  changes,  such  as  those 
from  1861  to  1879,  from  1893  to  1900,  and  from  1916  to  date. 
The  true  trend  is  much  more  definitely  indicated  by  periods 
when  prices  are  stable  or  are  drifting  steadily  in  one  direction 
or  the  other.  Figures  for  the  year  1921,  when  available,  may 
show  a  reversal  of  the  uptrend  in  1920,  but  such  reversal  will 
have  only  temporary  significance  owing  to  the  present  inata- 
bility  in  price  levels. 


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96 


SOME  PERTINENT  STATISTICS  97 

The  figures  just  mentioned  cover,  however, 
what  is  relatively  a  very  short  period  in  eco- 
nomic history.  For  a  longer  view  of  the  changes 
in  real  wages  it  is  necessary  to  use  European 
statistics.  The  second  of  the  preceding  charts* 
shows  the  wages  of  English  agricultural  labor- 
ers and  carpenters  from  1270  to  1890  in  terms 
of  the  amount  of  wheat  required  to  sustain 
a  normal  family.  It  will  be  seen  from  this 
chart  that,  prior  to  the  Industrial  Revolution, 
there  was  no  evidence  of  any  continued  up- 
trend in  real  wages.  On  the  contrary  the  in- 
dications were  all  in  favor  of  the  theory  that 
wages  must  periodically  drop  to  the  starvation 
level  and  remain  there  until  the  pressure  of 
population  had  been  relieved  by  war,  famine, 
or  pestilence. 

The  long  period  trends  of  real  wages  in 
France  and  Germany  are  similar  in  a  general 
way  to  the  English  trends,  although  the  in- 
creases following  the  Industrial  Revolution  ap- 
pear to  be  less  pronounced.  However,  Ameri- 
can economic  development  is  more  closely  re- 
lated to  English  development  than  to  that  of 
other  European  countries,  and  can  best  be 
studied  as  a  continuation  of  early  English  ex- 
perience. 

^Adapted  from  Hconomic  History  of  England  by  H.  O. 
Meredith,  pages  352-353.  See  also  A  History  of  Money  and 
Prices,  by  Schoenhof,  page  313. 


98    CURRENT  ECONOMIC  PROBLEMS 

THE  SIZE  OF  THE  NATIONAL  INCOME 

AVhen  we  combine  the  preceding  quite  de- 
pendable figures  for  the  increases  in  per  capita 
productivity  with  the  less  dependable,  but  still 
significant,  figures  for  increases  in  real  wages, 
it  is  evident  that  in  recent  years  there  has  been 
a  fundamentally  sustained,  although  occasion- 
ally fluctuating,  increase  in  the  quantity  of  use- 
ful goods  supplied  to  meet  the  needs  of  each 
individual  in  the  American  population.* 

A  further  check  on  this  evidence  is  supplied 
by  studies  of  the  national  income  as  a  whole 
and  of  its  distribution  among  individuals.  Un- 
til very  recently,  the  most  thorough  attempt 
at  such  a  study  for  the  United  States  was  that 
of  W.  I.  King.f  During  the  past  year,  how- 
ever, the  research  staff  of  the  National  Bureau 
of  Economic  Eesearch,  including  Wesley  C. 
Mitchell,  W.  I.  King,  F.  R.  Macauley,  and  0. 
W.  Knauth,  has  completed  and  published,  as 
Income  in  the  United  States,  a  very  thorough 
study  along  these  lines.  This  study  was  made 
in  two  separate  parts.  The  first  estimate  was 
made  by  summing  up  the  amount  of  all  income 

*Labor  unionists  claim  that  much  of  this  increase  in  pro- 
ductivity has  been  due  to  improvements  in  management  and 
processes  introduced  under  the  pressure  of  advancing  wage 
rates. 

\Tlie  Wealth  and  Income  of  the  People  of  the  United  States, 
by  W.  I.  King. 


SOME  PERTINENT  STATISTICS  99 

at  the  points  of  origin,  that  is,  by  adding  to- 
gether, by  industries  and  occupations,  pay- 
ments made  for  wages,  salaries,  and  personal 
services  as  a  whole,  and  payments  made  on  ac- 
count of  interest,  profits,  and  rents.  The  sec- 
ond estimate  was  made  by  summing  up  all  per- 
sonal incomes,  including  those  below  the  in- 
come tax  range,  as  well  as  those  above,  with 
proper  adjustments  for  under-reporting,  and 
so  forth. 

These  two  estimates  were  independently 
made,  and  when  completed  were  found  to  be 
in  very  close  agreement,  with  average  yearly 
differences  amounting  to  less  than  5%. 

The  final  estimates  of  the  Bureau  are  given 
in  the  table*  which  follows: 

INCOME  IN  THE  UNITED  STATES 


Total  Income 

Income  Per  Capita 

Income  Per  Capita 

Tear 

in  Billions 

in  Actual  Dollars 

in  1913  DoUarst 

1909 

$28.8 

$319 

$333 

1910 

31.4 

340 

349 

1911 

31.2 

333 

338 

1912 

33.0 

346 

348 

1913 

34.4 

354 

354 

1914 

33.2 

335 

333 

1915 

36.0 

358 

350 

1916 

45.4 

446 

400 

1917 

53.9 

523 

396 

1918 

61.0 

586 

372 

*Income  in  the  United  States,  pages  64,  68  and  76. 

tThls  column  indicates  purchasing  power  per  capita  in 
terms  of  dollars  having  the  purchasing  power  that  obtained 
in  1913. 


100   CURRENT  ECONOMIC  PROBLEMS 

THE  DISTRIBUTION  OF  THE  NATIONAL  INCOME  AMONG 
INDIVIDUALS 

If  we  accept  the  foregoing  figures  as  to  the 
size  of  the  national  income,  in  total  and  per 
capita  of  the  population,  the  next  question  is  as 
to  the  manner  in  which  this  income  is  distrib- 
uted among  indi\dduals.  Here  we  have  two 
major  points  of  view,  first  as  to  the  present  dis- 
tribution, and,  second,  as  to  the  trend  toward 
increasing  or  decreasing  concentration  in  a 
few  hands. 

As  to  the  present  distribution  the  most  de- 
pendable figures  are,  again,  those  of  the  Na- 
tional Bureau  of  Economic  Research  for  the 
year  1918.  During  this  year,  excluding  2,- 
500,000  soldiers,  sailors  and  marines,  there 
were  37,569,000  persons  in  the  United  States 
having  personal  incomes.  The  average  in- 
come per  person  was  $1,543.  About  one  income 
receiver  in  each  148  had  an  income  of  $10,000  a 
year  or  more.  These  larger  incomes  amounted 
in  all  to  about  $6,936,000,000,  or  12%  of  the 
total  income  of  all  persons.  If  these  larger  in- 
comes were  all  leveled  do^^^l  to  the  $10,000 
figure,  the  total  reduction  would  amount  to 
about  8%  of  the  national  income. 

All  of  the  preceding  figures,  it  should  be 
noted,  exclude  the  incomes  of  the  2,500,000  men 
engaged  in  military  service  during  1918. 
Furthermore,   they  include  no   allowance  for 


SOME  PERTINENT  STATISTICS 


101 


deductions  on  account  of  personal  income  taxes, 
which  in  1918  ranged  from  about  1  %  of  incomes 
between  $1,000  and  $3,000  to  about  8%  of  in- 
comes between  $10,000  and  $25,000,  and  up  to 
nearly  65%  of  incomes  of  $1,000,000  and  over. 
The  follo^\ing  table  gives  the  basic  data  from 
which  the  computations  in  the  preceding  para- 
graph were  made. 

A  CONDENSED  SUMMAEY  OF  THE  DISTRIBUTION  OF 
PERSONAL   INCOMES   IN   1918 

(Excluding  2,500,000  soldiers,  sailors,  and  marines.) 


Income  Class 

Number  of 

Amount  of 

Persons 
200,000 

Income 

Under 

Zero 

$—125,000,000* 

0-$ 

500 

1,827,554 

685,287,806 

500- 

1,000 

12,530,670 

9,818,678,617 

1,000- 

1,500 

12,498,120 

15,295,790,534 

1,500- 

2,000 

5,222,067 

8,917,648,335 

2,000- 

3,000 

3,065,024 

7,314,412,994 

3,000- 

5,000 

1,383,167 

5,174,090,777 

5,000- 

10,000 

587,824 

3,937,183,313 

10,000- 

25,000 

192,062 

2,808,290,063 

25,000- 

50,000 

41,119 

1,398,785,687 

50,000- 

100,000 

14,011 

951,529,576 

100,000- 

200,000 

4,945 

671,565,821 

200,000- 

500,000 

1,976 

570,019,200 

500,000- 

1,000,000 

369 

220,120,399 

1,000,000 

and  over 

Total... 

152 

316,319,219 

.  ..   37,569,060 

$57,954,722,341 

A  supplemental  viewpoint  with  respect  to  in- 
come distribution  relates  to  salaries  and  wages 

*Thi8  negative  figure  represents  the  speculative  and  business 
losses  of  certain  individuals  through  failures,  etc. 


102   CURRENT  ECONOMIC  PROBLEMS 

only.  For  the  large  organized  industries,  in- 
cluding mining,  manufacturing,  and  land  trans- 
portation, during  the  period  from  1909  to  1918 
inclusive,  manual  workers  and  clerical  em- 
ployees received  from  91.4%  to  93.0%  of  total 
payrolls,  while  the  percentage  paid  for  salaries 
of  officials  ranged  from  7.0%  to  8.6%,  the  aver- 
age being  7.7%*.  This  classification  is,  of 
course,  a  very  rough  one,  and  many  so-called 
officials  are  undoubtedly  little  more  than  cleri- 
cal workers,  foremen,  or  superintendents,  at 
rather  moderate  salaries. 

A  more  direct  test  of  the  relative  importance 
of  salaries  of  officials  is  obtained  by  computing 
the  effect  of  eliminating  all  salaries  above  a 
certain  maximum,  or  of  limiting  salaries  to  a 
determined  maximum.  For  the  Class  I  rail- 
roads of  the  U.  S.  in  1919,  which  operated  233,- 
808  miles  of  line,  the  total  salaries  of  division 
and  general  officers,  receiving  $3,000  per  an- 
num and  upward,  amounted  to  only  $46,783,- 
275,  as  compared  with  a  total  payroll  of  $2,- 
828,014,440.  The  higher  railroad  salaries  for 
this  group  of  roads  amounted,  therefore,  to 
only  a  little  more  than  1V2%  of  the  payrolls. 
For  the  Bell  Telephone  System  in  the  IT.  S., 
a  limitation  of  all  salaries  to  a  maximum  of 
$5,000  a  year,  in  1920,  would  have  brought 
about  a  reduction  in  such  higher  salaries  suf- 
ficient only  to  permit  an  increase  of  22  cents  per 
week  in  the  salaries  of  the  lower  paid  employees 

*  Income  in  the  United  States,  page  99. 


SOME  PERTINENT  STATISTICS  103 

if  the  savings  were  equally  divided.  Somewhat 
similar  conditions  undoubtedly  hold  true  for 
the  larger  manufacturing  and  commercial  or- 
ganizations ;  although,  on  the  other  hand,  there 
are  many  small  enterprises  in  which  a  few  large 
salaries  make  up  a  large  proportion  of  the  total 
disbursements  for  salaries  and  wages. 

The  second  major  viewpoint  in  connection 
with  income  distribution  is  with  respect  to  the 
tendency  toward  an  increasing  or  a  decreasing 
concentration  of  the  national  income  in  a  few 
hands.  As  to  this  point,  there  are  no  direct 
statistics  available  covering  long  periods,  al- 
though it  is  obvious  that  in  very  recent  years 
both  inheritance  taxes  and  personal  income 
taxes  have  operated  to  cause  a  decreasing, 
rather  than  an  increasing,  concentration,  so  far 
as  sums  actually  available  for  personal  expendi- 
ture are  concerned. 

THE   DISTRIBUTION    OF    THE    NATIONAL    INCOME    BETWEEN 
FACTORS  IN   PRODUCTION 

A  study  of  the  reports  of  the  Federal  Income 
Tax  Bureau  brings  out  very  clearly  the  fact 
that  large  incomes  are  almost  wholly  derived 
from  return  on  capital  and  rents  of  natural  re- 
sources. For  example,  in  the  year  1919,  only 
15.4%  of  incomes  between  $100,000  and  $150,- 
000  was  derived  from  salaries  and  wages. 

In  previous  chapters,  it  has  been  stated  that 
approximately  68%  of  the  national  income  was 


104   CURRENT  ECONOMIC  PROBLEMS 

received  for  salaries,  wages,  and  personal 
service,  about  24%  for  return  on  capital,  and 
about  8%  for  rents  of  natural  resources.  These 
figures  represent  the  writer's  personal  esti- 
mate, based  upon  certain  assumptions  as  to  the 
percentages  of  house  rents  that  are  assignable 
to  return  on  capital  and  to  land  rents,  combined 
with  other  figures  as  to  the  distribution  of  the 
value  product  of  all  classes  of  business  under- 
takings between  wages  and  salaries,  and  rents 
and  other  returns  on  property.  This  estimate 
is,  however,  very  well  substantiated  by  the  fol- 
lowing table  taken  from  Page  97  of  Income  in 
the  United  States.  ''Wages  and  salaries"  in- 
cludes all  pensions,  compensation  for  accidents, 
and  the  like.  "Management  and  property"  in- 
cludes rentals,  royalties,  interest,  and  divi- 
dends. "Net  value  product"  does  not  include 
raw  materials,  supplies,  and  services  received 
from  other  industries. 

DIVISION  OF    COMBINED   NET   VALUE   PRODUCT    OF 
MINES,   FACTORIES,    AND   LAND    TRANSPORTA- 
TION BETWEEN  EARNINGS  OF  EMPLOYEES 
AND   RETURNS   FOR  MANAGEMENT 
AND  THE  USE  OF  PROPERTY 

1909-1918 

Millions  of  Dollars  Per  Cent. 

Wages  and    Management      Wages  and     Management 
Year        Salaries        and  Property        Salaries        and  Property 

1909  '  $  6,481  $2,950  687?  3l73 

1910  7,156  3,250  68.8  31.2 

1911  7,287  2,791  72.3  27.7 

1912  7,993  3,169  71.6  28.4 

1913  8,651  3,359  72.0  28.0 


SOME  PERTINENT  STATISTICS  105 


1914 

7,947 

2,816 

73.8 

26.2 

1915 

8,722 

3,470 

71.5 

28.5 

1916 

11,630 

5,810 

66.7 

33.3 

1917 

14,375 

6,502 

68.9 

31.1 

1918 

17,472 

5,124 

77.3 

22.7 

In  the  above  table,  it  should  be  noted  that  un- 
distributed corporate  surpluses  are  counted  as 
part  of  the  payments  to  management  and  prop- 
erty, and  also  that  only  partial  allowance  is 
made  for  the  heavy  losses  to  management  and 
property  that  occur  in  connection  with  the  fail- 
ure and  liquidation  of  many  concerns. 

It  is  obvious  that,  if  anything,  the  recent 
trend  has  been  toward  increasing  the  share  of 
labor  in  the  product  of  industry,  and,  as  indi- 
cated in  previous  chapters,  there  is  some  frag- 
mentary general  evidence  of  a  long  term  trend 
toward  a  decrease  in  the  share  of  capital. 
However,  the  disturbances  brought  about  by 
the  war  have  been  too  great  to  make  the  recent 
trend  particularly  significant;  and  there  is, 
furthermore,  no  reliable  single  set  of  figures 
from  which  a  long  term  trend  can  be  directly 
determined.  An  indirect  approach  to  the 
problem  may,  nevertheless,  be  made  by  com- 
paring the  annual  increases  in  per  capita  prod- 
uct with  the  annual  increases  in  real  wages, 
as  indicated  on  previous  charts.  This  com- 
parison tends  to  show  that  the  two  items  are 
increasing  from  year  to  year  at  about  the  same 
rate.     This  could  not  be  the  case  if  the  per- 


106   CURRENT  ECONOMIC  PROBLEMS 

centage  of  the  total  product  paid  for  the  use  of 
capital  and  the  rent  of  natural  resources  was 
either  increasing  or  decreasing  at  a  rapid  rate. 

CAN  THE  SHARE  OF  LABOR  BE  INCREASED? 

If,  then,  it  is  assumed  that  the  present  ten- 
dency is  for  the  share  of  ''labor"  in  the  na- 
tional product  to  remain  relatively  fixed  or  to 
increase  very  gradually,  the  question  still  arises 
as  to  whether  there  are  not  practicable  ways  to 
increase  this  share,  and  thus  to  secure  a  greater 
immediate  equality  of  distribution  of  income 
among  individuals.  Statistical  evidence  on  this 
point  is  very  difficult  to  obtain  or  present.  It 
is  necessary,  in  any  case,  to  emphasize  the  word 
''practicable,"  for  the  reason  that  it  might  be 
very  easy  to  set  up  plans  which  would  increase 
the  share  of  labor  in  the  product,  but  would  de- 
crease the  total  product  by  such  amount  as  to 
leave  labor  worse  off  than  before. 

There  are,  however,  two  indirect  ways 
through  which  an  approach  to  an  answer  to  this 
question  may  be  obtained. 

The  first  relates  to  the  necessity  for  a  volume 
of  savings  in  the  United  States  amounting, 
annually,  to  from  10%  to  16%  of  the  national  in- 
come. No  definite  and  convincing  statistical 
studies  along  this  line  have  yet  been  published, 
although  preliminary  studies  indicate  that  16% 


SOME  PERTINENT  STATISTICS  107 

is  nearer  to  the  facts  than  10%.  A  simple 
check  on  this  percentage  is  obtained  by  assum- 
ing that  the  physical  wealth  of  the  countiy  must 
increase  approximately  at  the  same  rate  as  the 
volume  of  physical  production,  that  is,  at  a  rate 
between  3%  and  4%  per  annum.  The  physical 
wealth*  of  the  country  (excluding  land)  may  be 
valued  at  about  four  times  the  annual  national 
income,  and  a  3%  or  4%  annual  addition  to  this 
wealth  would  require  that  from  12%  to  16%  be 
saved  out  of  each  year's  income. 

The  application  of  the  preceding  figures  to 
the  problem  of  a  possible  increase  in  the  share 
of  labor  is  this — that  these  savings  must  be  pro- 
vided if  economic  progress  is  to  continue ;  that 
the  bulk  of  new  capital,  today,  is  provided  by 
the  reinvestment  of  interest,  dividends  and 
rents ;  and  that,  if  * '  labor ' '  should  take  over,  by 
some  process,  the  entire  profits  of  property  and 
management  in  the  highly  organized  industries, 
this  sumf  of  from  five  to  six  bilhon  dollars  a 
year  would,  very  largely  or  wholly,  have  to  be 
reinvested  by  *' labor,"  for  its  own  self -protec- 
tion, in  new  productive  machinery.  Such  a 
change  would,  therefore,  result  primarily  in  a 
redistribution  of  wealth  and  ownership,  rather 
than  an  improvement  in  standards  of  living. 

"Estimated  from  figures  on  page  716,  Statistical  Abstract 
of  the  U.  S.,  1920,  published  by  Bureau  of  Foreign  and  Do- 
mestic Commerce. 

^Income  in  the  United  States,  page  97. 


108   CURRENT  ECONOMIC  PROBLEMS 

A  second  indirect  approach  to  the  problem  of 
a  greater  equalization  of  incomes  is  through 
consideration  of  the  actual  profits  in  trade  and 
industry.  Here  there  is  a  very  live  conflict  of 
statistics  and  statisticians.  The  ordinary  view 
of  business  profits  is  illustrated  by  the  chart  on 
the  following  page  which  is  based  (through  the 
selection  of  concerns  doing  a  strictly  competi- 
tive business)  upon  what  is  probably  the  most 
exact  study*  yet  made  of  profits  in  a  typical 
group  of  manufacturing  and  mercantile  estab- 
lishments, the  concerns  in  question  having  been 
chosen  at  random  from  among  those  whose  ac- 
counts had  been  audited  by  a  large  firm  of 
public  accountants.  If  these  figures  are  taken 
at  their  face  value,  it  would  appear  that,  while 
the  marginal  or  ''price  fixing"  concerns  earn 
only  simple  interest  on  their  investment,  the 
average  return  on  all  of  the  invested  capital 
is  between  13%  and  14%. 

If  these  average  earnings  are  correct,  there 
may  be  ground  for  feeling  that  some  further 
distribution  should  be  made  to  ''labor."  But 
many  practical  business  men  refuse  to  accept 
such  figures.  They  claim  that  a  study  of  "go- 
ing concerns"  is  meaningless  and  misleading, 
and  that,  if  all  the  legitimate  ventures  in  any 
competitive  industry  were  followed  through 
from  birth  to  death,  with  full  account  taken  of 

*J.  E.  Sterrett,  American  Economic  Review,  March,  1916. 


iN3WiS3AN|  nViOi  3O1N30  a3c| 

looinouooioo,-,^ 

^       ■^COCOOJOJ'-      —      ^      ^^ 

DISTRIBUTION  OF  AGGREGATE   INVESTMENT 
BY  PER  CENT  ANNUAL  RETURN   ON  INVESTMENT 

1 

1 

i 

1 

55                S 

5      20      24      28      32      36      40     4^ 

Return    on  Investment 

' 

F'gunes  based  upon  audited  returns  for 
one  or  more  pre-war  years,  generally  the 
year  1913.  Investment  includes    borrowed 
money 

.03%  of  total  investment  m  manufaclunmq, 
ond  1  4%of-total  investment  in  Inenconlile 
corporations,  earned  over  44%  per  annum. 

1 

1 

O  1 

2 

i 

1 

Q-                i 
c-                   e 

1 

1 

0)  !     #' 

; 

1 

i 

1         i  ^  v.-  \ 

i 

i 

I           ! 

A 

1      ■E"''                /  i      J 

^2      y 

^ 

-8-4        0        4        8       12       1( 

Per   Cent  Annual 

>.    1    \ 

-<I^J-- 

t 

■•.» 
"-^ 

*      "'^ 

\    1 

1    '         i 

1    '      \ 

u 

*■     %r     CD     CO     c^J     cj     ^-     ^     "•*    "- 

XN31MXS3ANI    -IViOl    dOlNBQ  dSJ 

109 


110   CURRENT  ECONOMIC  PROBLEMS 

all  gains  and  losses,  the  average  earnings  on 
the  invested  money  would  very  slightly,  if  at 
all,  exceed  the  going  rate  of  interest. 

EFFICIENCY  AND  WASTE 

In  presenting  these  and  other  statistics,  it  is 
not  to  be  expected  that  the  resulting  picture  will 
be  clear  and  distinct  in  every  Hne  and  angle. 
Yet  out  of  the  whole  there  may  properly  grow 
an  impression  of  an  economic  organization  that 
is  imperfect  in  a  thousand  ways,  and  yet  gains 
slowly  in  efficiency  as  the  years  go  by — that 
needs  readjustment  and  strengthening  in  many 
of  its  parts,  and  yet  can  not  safely  be  torn 
do^vn  or  suddenly  replaced  in  any  of  its  major 
elements.* 

*Socialist3  and  the  more  radical  labor  unionists,  even  when 
admitting  the  increasing  productivity  of  the  present  system, 
lay  much  stress  on  the  demand  of  the  ordinary  workers  for  an 
increased  share  in  the  control  of  industry.  This  feeling  Ib 
voiced  by  our  socialist  critic  who  says: 

"As  the  principal  movement  for  freedom  in  the  eighteenth 
and  nineteenth  centuries  was  that  for  democratizing  the  polit- 
ical machinery,  so  the  great  forward  looking  movement  among 
the  masses  of  today  is  that  for  the  democratizing  of  industry. ' ' 

He  claims,  in  addition,  that  the  present  economic  system  has 
broken  down  in  Europe  and  calls  attention  to  "the  fact  that 
the  24,000,000  members  of  the  International  Federation  of 
Trade  Unions  in  Europe — which  exclude  the  more  radical 
unions  of  the  Moscow  Trade  Union  International — have  gone 
on  record  in  favor  of  the  social  ownership  of  laud  and  capital." 

It  is,  however,  the  writer's  impression,  confirmed  to  some 
extent  by  conversations  with  British  labor  leaders,  that  much 
of  the  European  demand  for  a  radical  reorganization  of  in- 
dustry springs  unconsciously  from  class  distinctions,  traditions 
of  family  control,  etc-,  which  tend  to  prevent  many  specially 
capable  workers  from  securing  advancement  to  the  more  re- 
Bponsible  positions  in  management.  There  is  little  evidence 
that  a  Bimilar  demand  exists  in  American  business  organiza- 
tiouB  having  well  developed  merit  systems  for  promotion  from 
the  rauks. 


SOME  PERTINENT  STATISTICS  111 

This  picture  as  to  the  combined  strength  and 
weakness  of  our  economic  organization  is  re- 
enforced  when  we  come  to  study  the  wastes  and 
the  failures  to  secure  real  productivity  which 
characterize  every  branch  of  production  and 
distribution.  Statistical  evidence  along  these 
lines  is  too  voluminous  to  be  quoted  in  a  short 
chapter.  Reference  can,  however,  well  be 
made  to  a  recent  study*  by  a  group  of  engi- 
neers in  which  it  is  concluded  that  over  50%  of 
present  waste  is  chargeable  to  management, 
less  than  25%  to  labor,  and  the  balance  to  out- 
side agencies  and  the  public  as  a  whole. 

Yet  there  is  much  of  fallacy  in  the  demand 
for  100%  efficiency.  It  is  relatively  simple  to 
set  up  a  highly  efficient  plan  of  organization  or 
operation  for  a  given  business  organization  or 
industry,  at  a  given  date,  under  a  given  set  of 
conditions,  and  with  a  specially  selected  per- 
sonnel. But  times,  conditions,  and  methods 
change,  men  lose  health  or  grow  old,  and  man- 
agements cannot  be  reconstructed  day  by  day. 
The  real  test  of  industrial  vigor  lies  hardly  at 
all  in  current  efficiency,  but  almost  wholly  in  the 
annual  rate  of  increase  in  efficiency.  This  is  a 
fact  that  is  often  instinctively  recognized,  but 
is  rarely,  if  ever,  stated. 

Much  of  our  seeming  inefficiency  is  but  the 
price  of  growth  and  progress  and  evolution. 

*  Waste  in  Industry,  by  the  Federated  American  Engineering 
Societies. 


112   CURRENT  ECONOMIC  PROBLEMS 

The  oak  tree,  in  its  200  years  of  life,  will  scatter 
a  million  acorns  on  the  earth  in  order  that  one 
new  oak  tree  may  survive  the  death  of  the  old. 
Yet  if  this  new  oak  is  in  the  slightest  measure  a 
better  tree,  or  better  fitted  to  survive,  than  the 
old,  all  of  this  seeming  waste  is  in  fact  the  high- 
est of  efficiency.  The  economic  system  that 
gains  the  most  from  year  to  year  is  in  the  end — 
even  mthin  the  working  life  of  the  ordi- 
nary man — the  most  efficient,  regardless  of 
theoretical  defects  and  wastes.  If  we  should 
but  sacrifice  one-half  of  one  per  cent,  in  our 
rate  of  increase  in  productivity  to  secure  a 
maximum  present  gain  in  efficiency,  we  should 
quite  certainly  be  the  losers  in  20  years,  and 
forever  thereafter  would  lose  in  increasing 
ratio. 

When,  therefore,  all  the  facts  have  been  ex- 
amined and  all  the  theories  have  been  discussed, 
the  final  conviction  stands  forth  that  there  is  no 
royal  road  to  the  economic  millenium.  Each 
problem  must  be  solved  as  it  comes — a  better 
organization  here,  a  better  understanding  there, 
a  new  device  in  the  next  place,  more  foresight 
and  better  planning  in  still  another  place — and 
everywhere,  a  little  more  of  honesty,  of  public 
spirit,  and  of  real  knowledge,  and  a  little  less 
of  demagogy  and  partisanship — slowly  and  by 
infinite  adaptation  progress  will  be  gained. 


CHAPTER  V 

FACING  THE  FACTS 

A  RECOGNITION   OF   NEW   CONDITIONS 

NOT  many  months  ago,  the  writer  stood 
in  Hyde  Park  where  a  fairly  representa- 
tive cross-section  of  the  London  popula- 
tion gathers  nightly  to  discuss  every  imaginable 
subject  of  human  interest.  The  coal  strike  had 
just  been  settled.  Business  depression  was 
acute  and  the  future  held  small  promise  of  early 
improvement.  In  ordinary  times  many  of  the 
speakers  would  have  been  arguing  for  the  na- 
tionalization of  industries,  and  for  other  social- 
istic and  communistic  plans.  But  on  this  night 
the  temper  of  the  crowd  had  changed.  Promises 
of  an  early  millenium  had  failed.  Eadical  plans 
for  social  change  had  shown  their  weaknesses 
in  practice.  Nowhere  among  the  hundreds 
gathered  in  the  park  was  a  voice  raised  with  a 
concrete  proposal,  but,  on  the  contrary,  there 
came  from  all  sides  the  cry  '*We  must  study 
the  facts ;  we  must  find  out  what  can  be  done. ' ' 
This  revulsion  in  popular  sentiment  seems 
to  have  spread  over  the  world.  Demagogues 
and  false  prophets  are  beginning  to  be  dis- 

113 


114   CURRENT  ECONOMIC  PROBLEMS 

credited.  The  attempt  to  build  up  class  hatreds 
and  to  create  class  warfare  is  losing  ground. 
In  the  face  of  a  common  economic  disorder  and 
distress  the  world  is  hunting  for  the  real  facts 
and  for  real  leadership. 

In  this  changed  attitude  of  mind  there  is 
hope.  There  is  hope  also  in  the  critical,  dis- 
interested, and  impartial  studies  of  economic 
questions  that  are  being  made  in  every  country, 
not  only  by  professional  economists,  but  also 
by  far-seeing  labor  leaders  and  by  men  in 
responsible  positions  in  business  and  industry. 

In  the  United  States  there  are  at  present 
four  scientifically  organized  and  administered 
bureaus  for  economic  investigations,  the  Na- 
tional Bureau  of  Economic  Research,  Inc.,  the 
Harvard  Committee  on  Economic  Research,  the 
Pollak  Foundation  and  the  Economic  Institute. 
In  addition,  the  National  Industrial  Conference 
Board,  while  frankly  supported  by  a  group  of 
business  organizations,  is,  nevertheless,  doing 
much  economic  work  of  high  scientific  character. 

These  organized  activities  are  supplemented 
by  an  increasing  volume  of  popular  economic 
writings  and  editorial  work.  Such  articles 
and  editorials  in  the  Saturday  Evening  Post 
and  Colliers,  with  combined  weekly  circula- 
tions exceeding  3,000,000  copies,  are  of  notably 
high  quality.  Further  important  additions  to 
economic  fact  and  theory  are  being  made  by 
economic  and  statistical  units  organized  by  the 


FACING  THE  FACTS  116 

larger  banks  and  business  establishments  as 
agencies  toward  the  control  and  direction  of 
their  activities.* 

As  the  result  of  this  grooving  interest  in 
economic  investigations  practically  every  phase 
of  American  political  and  industrial  develop- 
ment is  being  subjected  to  a  critical  scrutiny. 
The  amount  of  the  national  income  and  its  dis- 
tribution— among  individuals  and  by  sources 
— has  been  very  accurately  determined,  year  by 
year,  from  1909  through  the  war  period.  Much 
attention  has  also  been  given  to  questions  of  in- 
dustrial organization  and  relations,  to  the  busi- 
ness cycle  and  the  possibility  of  controlling  its 
more  extreme  swings,  and  to  the  relations  be- 
tween government  and  industry. 

The  combined  effect  of  all  these  studies  has 
been  to  build  up  a  growing  mass  of  economic 
facts  that  are  beginning  to  be  accepted  by  pro- 
fessional economists,  business  men  and  many 
active  labor  leaders,  as  the  basis  upon  which 
future  industrial  developments  in  the  United 
States  must  take  place.  The  reaction  in  the 
United  States  from  the  world-wide  radical 
movement  of  the  last  few  years  has  not  only 
been  more  pronounced  than  elsewhere,  but  it 

*Meiition  should  also  be  made  of  the  Bureau  of  Industrial 
Eesearch  which  has  been  devoting  its  main  attention  to  the 
coal  industry  during  the  last  two  years,  and  the  Labor  Bureau, 
Inc.,  which  places  its  services  primarily  at  the  disposal  of  labor 
organizations. 


IIG   CURRENT  ECONOMIC  PROBLEMS 

also  differs  from  the  reactions  in  other  coun- 
tries through  the  fact  that  a  reaffirmed  behef  in 
the  essential  soundness  of  American  institutions 
is  being  supplemented,  perhaps  more  than  else- 
where, by  an  exact  knowledge  of  the  facts  and 
viewpoints  which  must  control  the  future  de- 
velopment and  evolution  of  such  institutions. 

It  is  the  writer's  purpose,  in  the  present 
chapter  to  discuss  briefly  some  of  the  more 
important  of  these  facts  and  viewpoints,  and  to 
indicate  in  a  general  way  their  possible  reac- 
tions ujion  organized  movements  for  the  im- 
provement of  working  conditions. 

POPULATION  AND  NATURAL  RESOURCES 

Among  the  older  of  economic  facts  to  which 
attention  has  been  newly  directed  is  the  neces- 
sity for  considering,  as  an  essential  part  of  any 
broad  economic  plan,  the  proper  balance  in 
each  country  between  population  and  natural 
resources. 

It  probably  never  will  be  true,  in  a  modern 
civilized  state,  that  population  will  be  limited 
by  an  actual  shortage  of  subsistence.  But  it 
seems  equally  certain,  for  every  country  and 
for  each  stage  in  economic  development,  that 
there  is  a  certain  population  which  '\\dll  permit 
the  attainment  of  the  highest  possible  standard 
of  comfort.  It,  furthermore,  seems  certain 
that,   irrespective   of  possible   temporary  im- 


FACING  THE  FACTS  117 

provements  in  conditions  through  economic  ad- 
vancement, population  in  certain  central 
European  and  Asiatic  countries  has  already  far 
outrun  the  point  at  Avhich  maximum  human 
comfort  may  be  maintained.  To  superimpose 
on  such  populations  the  benefits  of  modern 
sanitation,  and  modern  industrial  methods,  ap- 
parently can  result  only  in  rapidly  rising 
standards  of  human  desire,  accompanied  by 
rapid  increases  in  population  and  in  the  pres- 
sure of  population  upon  natural  resources. 
The  outcome  can  hardly  fail  to  be  renewed 
great  forceful  movements  of  population,  and  in- 
tensified military  and  economic  conflict. 

The  majority  of  trained  American  observers 
have,  for  these  reasons,  ceased  to  look  upon 
the  question  of  population  growth  as  an 
academic  one.  They  put  it  in  the  forefront  of 
economic  problems  and  feel  that,  in  many  parts 
of  the  world,  it  is  almost  an  idle  thing  to  dis- 
cuss other  questions  until  this  great  question 
has  been  squarely  faced. 

IMMIGRATION 

Closely  related  to  the  problem  of  population 
pressure  is  that  of  immigration.  The  early 
immigration  to  the  United  States  was  from 
peoples  closely  akin  to,  and  readily  assimilable 
into,  the  original  white  population.  There  were 
also  vast  areas  of  unsettled  fertile  land.     The 


118   CURRENT  ECONOMIC  PROBLEMS 

theory  grew  up,  therefore,  that  immigration 
should  be  unrestricted  and  that  the  American 
''melting  pot"  could  absorb  and  assimilate  un- 
limited immigration  of  whatever  kind  it  might 
be. 

During  recent  years  conditions  have  become 
very  different.  The  present  immigrants  are 
assimilated  with  difficulty;  many  seem  to  be 
permanently  non-assimilable;  and  the  absence 
of  unoccupied  farming  lands  leads  to  a  harmful 
concentration  of  the  newer  immigration  in  the 
large  cities.  It  has,  therefore,  come  to  be 
realized  that  a  nation  that  is  striving  for  an  ad- 
vanced civilization  must  preserve  a  substantial 
unity  of  races,  of  ideals,  and  of  basic  standards 
of  living,  and  must  avoid  to  the  utmost  the 
establishment,  by  accident  or  design,  of  any 
social,  industrial,  or  racial  dividing  lines  which 
may  tend  to  deny  the  fullest  opportunity  to 
each  individual  for  advancement  in  accordance 
with  his  natural  capacity.  Such  a  nation, 
furthermore,  must  by  no  chance  become  divided 
into  two  elements  of  population,  one  seeking  to 
maintain  higher  standards  of  comfort  through 
the  limitation  of  numbers,  and  the  other  tend- 
ing to  bring  about  lower  standards  of  comfort 
through  population  increases  of  the  sort  to 
press  hard  upon  the  supporting  power  of 
natural  resources.  A  policy  of  reasonable  re- 
striction of  immigration  into  the  United  States 
should,  therefore,  become  a  permanent  one.  The 


FACING  THE  FACTS  119 

immigration  of  races  having  racial  characteris- 
tics, ideals  and  traditions  radically  different 
from  those  of  the  original  population  has 
tended  to  destroy  social  unity,  and  must,  there- 
fore, be  checked.  The  unrestrained  pressure  of 
population  in  European  and  Asiatic  areas  must 
not  be  permitted  to  transfer  itself,  through  un- 
restricted emigration,  to  the  United  States. 

These  newly  developed  American  policies  are 
not  peculiar  to  America  alone,  and  must  be 
looked  upon,  from  a  broad  economic  standpoint, 
as  policies  that  eventually  will  find  world-wide 
application. 

THE  DISTRIBUTION  OF  INCOME 

Next  in  order  of  importance,  after  problems 
of  population,  immigration,  and  natural  re- 
sources, is  that  of  the  distribution  of  income. 
Since  the  time  of  Karl  Marx,  a  large  part  of  the 
agitation  for  radical  social  and  industrial 
change  has  been  based  upon  the  belief  that 
capital  was  absorbing  a  large  and  increasing 
proportion  of  the  income  of  modem  industrial 
nations,  and  that  the  direct  road  to  improved 
conditions  for  the  average  worker  was  through 
the  taking  over  by  ''labor"  of  much  or  all  of 
the  income  received  by  "capital."*     The  lack 

*Our  socialist  critic  writes:  "It  must  be  said,  however, 
that  much  of  the  socialist  literature  for  the  last  half  century 
has  dealt  with  the  wastes  of  competition,  as  well  as  wealth  in- 
equality, and  that  socialists  are  laying  increasing  emphasis  on 


120   CURRENT  ECONOMIC  PROBLEMS 

of  evidence  to  justify  this  belief  has,  however, 
been  quite  fully  indicated  during  recent  years 
by  many  careful  and  impartial  studies,  among 
which  those  of  Professor  Bowley  in  England 
and  Dr.  King  in  the  United  States  are  of  special 
importance.  Still  more  exhaustive  and  careful 
studies  of  the  National  Bureau  of  Economic 
Research  in  the  United  States,  which  have  re- 
cently been  publishedf,  confirm  the  results  of 
these  earlier  investigations. 

From  all  of  these  studies  there  develop  cer- 
tain primary  conclusions  which  cannot  be 
avoided  by  any  observer  who,  in  good  faith,  is 
searching  for  the  facts.  These  conclusions  are 
substantially  the  same  in  general  character  for 
all  industrial  nations.  They  may  be  enumer- 
ated for  the  United  States  as  follows : 

1.  A  limitation  of  the  maximum  individual 
income  to  that  of  the  highly  skilled  worker  (say 
$3,000  per  annum)  vnih.  a  pro  rata  distribution 

this  aspect  as  time  goes  on.  At  the  time  of  Marx,  there  ■was 
little  organization  among  the  Avorkers  to  ensure  the  workers 
more  than  an  existence  wage,  and  the  profits  of  capital  mounted 
ever  higlier.  Marx  indicated  that,  wliile  tlie  tendency  of  capi- 
tal, unhampered  by  opposing  forces,  was  to  absorb  an  ever  in- 
creasing proportion  of  the  social  product,  capitalism  was  de- 
veloping within  its  bosom  a  working  class  ever  better  or- 
ganized, ever  better  educated.  Socialists  claim  that  this 
opposing  force  to  unhampered  capitalism,  which  Marx  also  pre- 
dicted would  arise,  has,  by  economic  and  political  pressure, 
largely  counteracted  the  tendency  of  capital  to  obtain  an  in- 
creasing share  of  the  product  of  industry. ' ' 

\lncome  in  the  United  States,  the  National  Bureau  of 
Economic  Eesearch,  Inc.,  474  West  24th  Street,  New  York  city. 


FACING  THE  FACTS  121 

of  all  excess  to  those  having  incomes  equal  to  or 
lower  than  those  of  such  skilled  workers  would 
add  not  over  25%  to  the  lower  incomes.  This 
percentage  would  be  noticeably  reduced  if  al- 
lowance were  made  for  the  income  taxes  paid 
by  the  receivers  of  the  larger  incomes.  If  the 
upper  limit  were  fixed  at  $10,000  per  annum, 
the  increase,  through  a  similar  redistribution, 
would  be  less  than  10%.  This,  again,  is  without 
allowance  for  the  heavy  personal  taxes  now 
paid  by  those  in  the  $10,000,  and  higher,  income 
classes. 

2.  High  salaries  are  a  negligible  factor  in 
the  inequality  of  income  distribution.  Practi- 
cally the  whole  of  such  inequality  is  due  to  rents 
and  return  on  capital. 

3.  Separations  between  total  income  from 
labor  (personal  service),  return  from  capital, 
and  rents  of  natural  resources,  are  difficult 
owing  to  the  vast  number  of  small  entre- 
preneurs— farmers,  shopkeepers,  small  manu- 
facturers, self-employed  tradesmen,  and  so 
forth.  Nevertheless  it  can  be  said,  with  suf- 
ficient accuracy  for  practical  purposes,  that, 
during  the  war  and  early  pre-war  period  in  the 
United  States,  approximately  68%  of  the  na- 
tional income  was  received  for  labor,  24%  was 
received  for  capital,  and  8%  for  rent  of  land 
and  other  natural  resources.  Here,  once  more, 
no  allowance  is  made  for  personal  income  taxes. 


122   CURRENT  ECONOMIC  PROBLEMS 

4.  So  far  as  the  proportion  of  the  national 
income  accruing  to  capital  and  natural  re- 
sources constitutes  a  problem,  it  is  separable 
into  several  distinct  elements.  The  rent  of  land 
and  natural  resources  differs  fundamentally 
from  other  returns  on  property,  and  must  have 
separate  consideration  under  any  economic 
plan.  Furthermore,  the  24%  of  the  national 
income  that  accrues  to  capital  proper  can 
be  split  into  two  distinct  parts.  Somewhat  less 
than  one-half  of  the  24%,  or  about  11%  of  the 
national  income,  is  derived  from  capital  em- 
ployed in  the  larger  and  more  highly  organized 
industries  and  enterprises — mining,  manufac- 
turing, transportation  and  other  public  utili- 
ties, and  banking — and  somewhat  more  than 
one-half  of  the  24%,  or  about  13%  of  the  na- 
tional income,  represents  interest  and  divi- 
dends, or  their  equivalent,  on  investments  in 
houses,  farm  equipment,  merchandising  estab- 
lishments, equipment  of  small  tradesmen,  and 
so  forth. 

THE  AVERAGE  RATE  OF  PROFIT 

Supplementing  these  figures  as  to  income  dis- 
tribution are  certain  other  facts,  slowly  accumu- 
lating, which  bear  very  directly  upon  the  rela- 
tion of  the  average  worker  to  the  so-called 
"capitalistic  system."    Many  years  ago  Adam 


FACING  THE  FACTS  128 

Smith  stated  that  in  his  time  *  *  double  interest ' ' 
was  considered  a  fair  profit;  and,  curiously 
enough,  there  is  considerable  evidence  that  per- 
haps the  most  accurate  general  statement  that 
can  be  made,  today,  regarding  the  average  rate 
of  return  on  money  employed  in  business  and 
industrial  enterprises,  is  that  going  concerns 
earn  *' double  interest." 

With  this  as  his  fundamental  belief,  the 
present  writer  accepted  some  time  ago  a  com- 
mission to  write  a  pamphlet  telling  how  a  care- 
ful investor,  by  distributing  his  money  among 
well-chosen  new  enterprises,  could  secure  nearly 
double  the  return  that  he  might  by  investing  in 
seasoned  securities  or  by  loaning  his  money  at 
current  rates  of  interest.  However,  the  further 
the  subject  was  investigated  the  less  promising 
it  looked.  A  considerable  inquiry  among  in- 
vestment experts  revealed  no  wdse  investors 
who  had  systematically  traveled  this  apparently 
sure  road  to  fortune.  Powerful  labor  unions, 
mth  ample  funds  in  their  treasuries  to  own 
and  control  their  own  enterprises,  and  with 
memberships  which  would  assure  them  of 
specially  favorable  markets  for  their  products, 
showed  no  such  eagerness  to  enter  into  the  in- 
dustrial field  as  might  be  expected  if  profits 
were  really  equal  to  ''double  interest." 

The  facts  seemed  to  be  that  figures  based  on 
going  concerns  were  highly  misleading.  Each 
new  enterprise  seemed  to  pass  through  one  or 


124   CURRENT  ECONOMIC  PROBLEMS 

more  reorganizations,  with  accompanying  heavy 
losses  to  investors,  before  it  really  became  a 
going  concern;  and  each  going  concern  sooner 
or  later  died,  or  became  wholly  or  partially 
crippled.  The  immutable  laws  of  nature  ap- 
plied alike  to  man  and  his  legal  creatures.  The 
corporation,  like  the  man,  could  not  count  the 
earnings  of  its  robust  years  as  clear  profit.  It, 
equally  with  the  man,  must  make  provision  for 
youth  and  old  age,  for  sickness,  misfortune  and 
death.  This,  at  least,  became  the  writer's  con- 
viction— that  taking  all  legitimate  ventures  in- 
to account,  and  considering,  as  a  whole,  their 
failures  and  successes,  their  many  risks  and 
their  few^  certainties,  their  youth,  their  robust 
years,  and  their  old  age,  the  average  profit  on 
the  capital  employed  in  industry  was  not 
*' double  interest,"  but  on  the  contrary  ex- 
ceeded ''single  interest"  by  a  relatively  small 
margin,  if  any. 

THE    PROFITS    OF    MARGINAL   CONCERNS 

The  foregoing  opinion  is  shared  by  many  of 
those  observers  who  are  in  best  position  to 
know  the  facts.  It  is,  nevertheless,  only  an 
opinion,  however  well  grounded,  and  must  await 
the  result  of  investigations  now  being  planned 
before  it  can  assume  a  definite  place  in  economic 
theory. 


FACING  THE  FACTS  125 

There  is,  however,  another  analysis  of  profits 
in  competitive  business  as  to  which  the  facts 
are  more  definitely  determined.  It  has  been 
found  that  when  any  branch  of  competitive  busi- 
ness is  studied  by  itself,  there  are  great  dif- 
ferences in  the  rates  of  profit  realized  by  differ- 
ent concerns.  Not  only  do  the  concerns  vary 
wddely  among  themselves,  when  studied  over 
long  periods,  but  each  individual  concern  also 
shows  great  variations  in  profits  from  year  to 
year.  There  are  not  only  the  variations  due 
to  the  business  cycle,  but  also  the  variations 
due  to  changes  in  trade  currents,  changes  in 
management,  and  so  forth. 

As  the  result  of  these  underlying  conditions, 
it  is  possible  in  a  normal  year  to  divide  the  in- 
vested capital,  in  any  line  of  competitive  busi- 
ness, roughly  into  three  classes.  The  first  class 
represents  investments  in  concerns  that  are  on 
the  verge  of  failure  and  are  earning  less  than 
a  normal  interest  on  their  capital.  About  10% 
of  the  total  capital  falls  in  this  class.  The 
second  class  represents  capital  invested  in  con- 
cerns which,  as  a  group,  are  earning  about  a 
normal  interest  rate.  This  is  the  so-called 
marginal,  or  price-fixing,  group,  in  which 
roughly  40%  of  the  total  capital  is  invested. 
The  third  class  of  capital,  amounting  to  about 
50%  of  the  total,  represents  that  invested  in 
the  really  successful  concerns.     These  concerns 


126   CURRENT  ECONOMIC  PROBLEMS 

earn  substantially  more  than  a  normal  interest 
on  the  money  employed,  and  raise  the  total 
earnings  of  all  going  concerns  to  something 
approximating  ''double  interest." 

The  most  significant  fact  in  connection  with 
this  normal  distribution  of  invested  capital  is 
that  it  seems  to  be  independent  of  the  general 
average  of  managerial  skill  in  the  industry  or 
business.  In  other  words,  if  we  could  conceive 
all  business  and  industry  to  be  managed  with 
an  average  skill  twice  as  great  as  that  which 
now  obtains,  it  is  probable  that  we  would  still 
find  these  same  differences  in  rates  of  profit. 
This  is  what  might  be  expected.  It  is  impos- 
sible for  all  men  and  all  business  organizations 
to  be  equally  skillful  or  to  have  equal  advan- 
tages with  respect  to  location,  markets,  and  so 
forth,  and  very  shght  variations  in  managerial 
skill  and  in  natural  advantages,  as  any  experi- 
enced executive  knows,  will  produce  very  great 
variations  in  profits. 

If,  then,  we  accept  these  variations  in  rates 
of  profit  as  necessary  and  inevitable,  we  are 
face  to  face  with  a  definite  series  of  facts.  First 
of  all,  the  marginal  and  submarginal  groups  of 
concerns  turn  out  50%  of  the  total  product  (or 
50%  of  the  total  services)  and  must  continue  to 
operate  if  the  market  is  to  be  supplied.  In  the 
second  place,  the  marginal  group  necessarily 
fixes  the  basic  prices  to  be  charged  by  all  con- 


FACING  THE  FACTS  127 

cems.  And  in  the  third  place  these  marginal 
concerns,  since  they  earn  only  a  bare  going  in- 
terest rate  on  their  capital,  must  vary  their 
prices,  in  the  long  run,  by  an  amount  which  will 
exactly  compensate  for  every  change  in  market 
wages,  which  is  not  accompanied  by  a  corre- 
sponding change  in  productivity. 

THE   RELATIVE    MONOPOLY   POWER   OF   LABOR  AND 
CAPITAL 

All  of  the  preceding  facts  and  viewpoints  lead 
up  to  the  now  generally  accepted  conclusion 
that  material  progress  for  humanity  must  be 
sought  not  primarily  in  a  better  distribution  of 
income,  but  rather  in  a  greater  per  capita  pro- 
ductivity. There  is,  however,  a  further  con- 
clusion which  would  develop  if  it  should  prove 
to  be  true,  as  seems  probable,  that  capital  in- 
vested in  business  and  industrial  enterprises 
earns,  on  the  whole  and  in  the  long  run,  only  a 
living  wage,  i.  e.,  the  current  rate  of  interest. 
This  conclusion  is  to  the  effect  that  there  is 
little  or  no  real  margin  which  labor  can  claim  or 
secure  from  capital  by  organized  effort  to  raise 
the  wage  paid  for  a  given  output.  This  is  cer- 
tainly true  as  to  the  so-called  ^'marginal"  and 
**  sub-marginal "  concerns,  and,  as  previously 
indicated,  it  appears  to  be  true  for  business  and 
industry  as  a  whole. 


128   CURRENT  ECONOMIC  PROBLEMS 

With  respect  to  the  efforts  of  organized 
labor,  there  have,  in  the  past,  been  two  opposing 
economic  theories.  One  was  that  wages  were 
determined  by  the  relative  monopoly  power  of 
land,  labor  and  capital.  This  theory  assumed 
that  labor,  by  establishing  a  special  monopoly 
power,  might  secure  for  itself  rewards  which 
othermse  w^ould  go  to  the  owiiers  of  land  and 
capital.  The  opposing  theory  is  that  labor  is 
the  ''residuary  legatee"  and  as  such  receives,  in 
the  end,  all  the  gains  from  improved  industrial 
machinery  and  productivity  except  a  "living 
wage"  for  capital,  and  ordinary  (non-mo- 
nopolistic) rents.  Undoubtedly  the  truth  lies 
somewhere  between  these  two  theories,  but  the 
evidence  is  strong  that  the  possible  margins 
which  labor  might  claim  by  establishing  its 
monopoly  power  are  much  too  small  to  offset 
the  minimum  losses  to  the  working  population 
and  the  community  as  a  whole  that  must  result 
from  any  labor  program  that  is  based  primarily 
upon  the  monopolistic  idea.  It  is  certainly 
true  that  labor  cannot  hope  to  gain  unless  it 
uses  its  monopoly  power  to  increase  produc- 
tivity and  to  secure  greater  rewards  not  only 
for  labor,  but  for  invested  capital  as  well.* 

*Our  socialist  commentator  writes,  as  to  this  paragraph: 

"An  alternative  which  labor  throughout  the  world  is 
choosing  to  an  ever  greater  extent,  as  has  been  stated  before, 
is  that  of  social  ownership  and  social  investment.  Granting, 
however,  the  continuance  of  private  investment,  it  is  not  clear 
to  labor  what  rate  of  interest  is  necessary  to  cause  people  to 


FACING  THE  FACTS  129 

A   SPECIAL  VIEWPOINT 

If  we  could  conceive  a  situation  under  which 
the  average  worker's  hourly  wage  was  made 
the  monetary  unit,  and  the  hourly  wage  of  each 
worker  was  justly  fixed  with  respect  to  this 
unit,  taking  fair  account  of  his  skill  and  pro- 
ductivity, we  should  almost  automatically  have 
a  new  political  economy.  It  is  of  interest  to 
follow  through  the  reactions  from  such  a  plan. 

First  of  all,  as  to  hours  of  labor,  we  might 
conceive  that  each  worker  would  be  paid  his 
standard  rate  up  to  that  number  of  hours  per 
week  at  which  he  could  work  over  long  periods 

invest  extensively  enough  to  keep  the  industrial  machine  going 
and  improving.  Many  people  of  small  means  place  their 
savings  in  the  bank,  which  in  turn  is  an  investor,  with  the  ex- 
pectation of  little  or  no  interest — merely  as  a  place  for  safe 
keeping  until  old  age.  Others  are  satisfied  with  low  interest 
on  municipal  or  state  bonds.  Capital  does  not  need  the  'living 
wage' — in  some  ways  a  misnomer — in  the  same  sense  as  does 
labor.  If  interest  rates  were  universally  two  or  three  per  cent., 
rather  than  six  per  cent.,  would  not  the  great  bulk  of  capital 
now  invested,  continue  to  be  invested?  Has  this  problem 
been  ever  adequately  considered?  Again  labor  insists  that  the 
extent  to  which  modern  profits  have  in  them  the  element  of 
monopoly  must  be  determined  before  the  author's  thesis  can 
be  proved. 

"It  is,  however,  of  interest,  that  a  number  of  the  more 
radical  unions  of  the  country,  such  as,  for  instance,  the  Amal- 
gamated Clothing  Workers  of  America,  are  insisting  that  their 
members  accompany  their  demand  for  higher  wages  with  guar- 
antee of  high  production  standards.  The  forward  looking 
workers  are  realizing  that  productivity  must  be  increased,  and 
in  many  recent  wage  disputes  they  have  investigated  the 
administration  of  their  respective  industries  and  have  insisted 
that  management  should  put  its  house  in  order  and  eliminate 
practices  that  impede  production.  At  the  same  time  they  have 
frowned  upon  a  suggestion  of  'sabotage'  by  their  own  mem- 
bers." 


130   CURRENT  ECONOMIC  PROBLEMS 

with  full  efficiency  in  his  particular  occupation, 
and  that  for  added  regular  hours  of  work  (as 
distinguished  from  emergency  overtime)  his 
hourly  rate  would  decrease  in  such  manner  as 
to  allow  for  all  elements  of  decreased  efficiency 
with  longer  working  hours.  Very  possibly  it 
would  be  found,  in  many  occupations  requiring 
close  concentration  or  intense  effort,  that  the 
rate  for  the  ninth  or  tenth  hour  would  approach 
zero.  The  worker  under  such  circumstances 
would  face  the  facts  clearly.  He  could  choose 
deliberately  the  length  of  working  day  and  cor- 
responding income  which  gave  him  the  greatest 
real  return  in  comfort,  health,  and  leisure  com- 
bined. He  would  realize  that,  except  under 
very  rare  and  special  circumstances,  the  ques- 
tion of  hours  of  labor  was  one  of  no  interna- 
tional importance  whatever.  He  would  see, 
also,  that  hours  of  labor  might  properly  vary 
in  the  same  occupation  as  between  the  city  and 
the  country.  He  might  even  appreciate  the 
danger  of  forcing  a  harmful  concentration  of 
industrial  development  in  the  larger  cities 
through  the  establishment  of  uniform  wages 
and  hours  of  labor  in  all  localities.  He  might 
recognize  the  fact  that  eight  hours  of  labor  in 
a  large  city  would  involve,  perhaps,  the  same 
strain  as  nine  hours  of  labor  in  a  country  town ; 
and  he  might  agree  that  the  same  pay  should 
be  given  for  the  nine  hours  of  country  labor 
as  for  the  eight  in  the  city,  in  order  that  the 


FACING  THE  FACTS  131 

saving  in  labor  costs  in  the  country  might 
operate  to  offset  disadvantages  in  transporta- 
tion, and  so  forth,  and  thus  permit  many  in- 
dustries to  be  established  in  small  cities  with 
resulting  improvement  in  the  workers'  general 
living  conditions. 

Next,  as  to  prices  of  commodities,  the  worker, 
as  previously  indicated,  would  practically  have 
eliminated  questions  of  wages  and  hours  of 
labor.  His  prime  interest  would,  therefore,  be 
in  prices.  He  would  look  with  immediate  favor 
on  plans  for  a  larger  degree  of  simplification 
in  the  variety  and  types  of  essential  commodi- 
ties. He  would  see  very  clearly  the  personal 
advantages  to  him  in  improved  processes  and 
machinery,  and  he  would  directly  and  immedi- 
ately resent  any  action  by  other  groups  of 
workers  that  tended  improperly  to  increase  the 
prices  of  the  things  he  purchased.  Finally,  also, 
he  might  realize  that  the  constant  cheapen- 
ing of  commodities  upon  which  his  increases  in 
real  wages  depended  could  not  take  place  mth- 
out  such  rates  of  return  on  invested  capital  as 
were  necessary  to  encourage  enterprise  and 
industrial  progress. 

All  of  the  preceding  vie^v'points  would  come 
automatically  if  we  had  a  monetary  standard 
based  on  the  hour  of  labor.  Yet  the  economic 
factors  and  operations  would  be  unchanged. 
The  only  difference  would  be  that  certain  neces- 
sary relations,  which  are  now  obscured  by  con- 


132   CURRENT  ECONOMIC  PROBLEMS 

slant  changes  in  price  and  wage  levels,  would 
become  obvious  with  wage  levels  fixed  once  for 
all,  and  with  prices  the  only  variable.  Similarly, 
it  might  soon  be  recognized  that  no  special 
determinations  of  the  relative  value  of  the  labor 
of  different  workers  and  classes  of  workers 
could  exceed  in  accuracy  or  fairness  that  deter- 
mination which  the  combined  judgment  of  the 
whole  community  now  enforces,  and  over  long 
periods  probably  always  will  enforce,  through 
the  operations  of  the  so-called  '4aw  of  supply 
and  demand." 

A  CONSTRUCTIVE  PROGRAM 

But  the  arguments  from  the  hypothetical 
labor  standard  of  value  have  been  carried  far 
enough.  The  essential  point  is  that  there  is 
growing  up  in  the  United  States  a  body  of  in- 
telligent and  human-minded  opinion  that  sees 
only  waste,  hopeless  conflict,  and  disorder  as 
the  outcome  of  most  of  the  present  effort  for 
the  improvement  of  the  conditions  of  the  masses 
of  the  working  population. 

This  body  of  opinion  is  firmly  convinced  of 
the  fundamental  soundness  and  productivity  of 
the  capitalistic  system.  It  recognizes  competi- 
tive wastes,  but  holds  these  to  be  less  serious 
and  more  easily  remedied  than  the  unavoidable 


FACING  THE  FACTS  133 

wastes  of  a  socialistic  system.*  It  insists  that 
the  law  of  supply  and  demand  shall  govern  mar- 
ket wages  as  well  as  prices;  it  contends  that 
forced  increases  in  the  market  wage  result  only 
in  increased  prices  and  the  advantage  of  one 
group  of  workers  over  the  others;  yet  it  con- 
tends, also,  that  the  test  of  real  managerial 
skill  is  the  ability  to  pay  more  than  a  market 
wage,  mthout  increasing  prices,  and  with 
mutual  profit  to  employer  and  employee.  It 
believes  in  a  frank  discussion  of  industrial 
problems  and  profits  with  all  employees ;  but  it 
would  share  profits  and  the  responsibility  of 
management  only  with  those  who  are  willing 

*A8  to  the  waste  of  the  socialistic  system,  our  critic  says: 

"The  argument  that  socialism  will  bring  about  waste  and 
inefficiency  is  generally  based  on  the  assumption  that  the  so- 
cialistic system  will  fail  to  provide  adequate  incentive  for 
work.  This  assumption  is  in  turn  based  on  two  further  as- 
sumptions; namely,  that  socialists  urge  an  absolutely  equal 
wage  to  all  workers,  or  a  wage  according  to  needs,  and,  sec- 
ondly, that  the  profit  incentive  is  and  will  always  remain  the 
principal  incentive  for  industrial  activity.  Socialists,  how- 
ever, have  no  objection  to  a  difference  of  compensation  based 
on  ability  and  productivity,  and  declare  that,  under  a  system 
of  social  ownership,  every  incentive  known  to  the  present 
system  could  be  brought  into  play  to  produce  the  highest 
results.  They  affirm,  however,  that  many  other  incentives  be- 
sides the  money  incentive — the  incentive  of  social  prestige,  the 
pleasure  coming  from  creative  and  artistic  activity  and  the 
doing  of  any  work  well,  loyalty  to  the  interest  of  particular 
groups,  and  mere  custom,  can  be  utilized  in  industry  much 
more  effectively  than  they  now  are.  In  the  cooperative  move- 
ment, in  certain  branches  of  the  public  service,  in  many  of  the 
professions,  and  even  in  business,  one  sees  these  incentives  now 
in  operation  to  a  greater  or  less  extent.  If  the  criterion  of 
success  in  business  were  the  character  of  service  rendered  the 
community,  rather  than  the  amount  of  money  accumulated, 
the  profit  incentive  would  lose  much  of  its  power  over  men. ' ' 


134   CURRENT  ECONOMIC  PROBLEMS 

to  share  the  risks  of  the  enterprise  by  investing 
in  its  securities.  And,  finally,  it  seeks,  mthin 
each  industry,  to  insure  regularity  of  employ- 
ment and  the  fullest  possible  protection  against 
sickness,  accident,  incapacity  and  death. 

These  points  of  view,  and  the  program  which 
goes  with  them,  are  in  themselves  fundamen- 
tally constructive — ^but  they  are  destructive  of 
many  things  that  for  years  have  been  taught 
as  the  very  foundations  of  policy  in  the  labor 
movement. 

For  a  succession  of  conflicts  and  armed 
truces  this  opinion  would  substitute  cooperation 
and  the  slow  building  up  of  sound  industrial 
traditions.  For  distrust  between  employer  and 
employee  it  would  substitute  mutual  confidence 
and  frankness  of  understanding.  For  the 
present  militant  and  monopolistic  type  of  labor 
organization  it  would  substitute  the  employees' 
association  and  the  shop  committee,  reenforced, 
as  to  problems  affecting  all  classes  of  workers, 
by  national  organizations  Avhich  shall  think  in 
terms  of  economic  research  and  popular  educa- 
tion, rather  than  in  terms  of  the  strike  and  the 
boycott.* 

*Our  critic  comments  as  follows  regarding  this  paragraph: 

"The  advanced  labor  movement  in  this  country  is  laying 
increasing  emphasis  on  constructive  measures  which  lead  to  a 
new  status  in  labor,  and  is  consequently  relying  less  exclu- 
sively upon  the  strike  and  boycott.  A  number  of  national 
unions  are  developing  research  bureaus,  as  in  the  case  of  the 
railway     brotherhoods,     the     International     Ladies     Garment 


FACING  THE  FACTS  136 

There  is  today  in  the  United  States  a  growing 
number  of  business  organizations  that  are  giv- 
ing practical  application  to  these  principles  and 
policies.  The  response  on  the  part  of  their 
employees  can  perhaps  best  be  illustrated  by 
quoting  from  a  letter  written  by  a  previously 
discontented  worker  to  his  superintendent 
about  three  years  after  he  had  left  the  employ- 
ment of  one  of  these  companies.     The  company 

Workers  and  the  Amalgamated  Clothing  Workers.  They  are 
building  up  their  own  labor  colleges,  and  in  1921  organized  a 
Workers'  Education  Bureau  on  a  national  scale.  They  are 
establishing  their  own  banks,  going  extensively  into  coopera- 
tive enterprises,  seeking  corrective  legislation,  setting  up  a 
machinery  for  tlie  settlement  of  disputes,  organizing  their  own 
health  service,  purchasing  recreational  centers,  developing 
production  standards,  systems  of  unemployment  insurance,  and 
of  shop  control,  and  gradually  evolving  a  labor  statesmanship 
of  a  high  order.  Although  these  developments  exist  in  a 
minority  of  unions,  recent  progress  in  that  direction  has  been 
of  no  small  significance. 

"National  and  international  unions  have  come  to  stay.  Local 
employees  are  often  at  a  great  disadvantage  when  bargaining 
with  their  employers,  because  of  lack  of  training  and  their 
fear  of  discharge.  It  is  but  natural  that  the  workers  should 
turn  for  aid  to  an  organization  of  national  scope  to  defend 
their  rights.  Most  company  unions  have  hitherto  been  owned 
body  and  soul  by  the  company.  The  present  international 
unions  have  many  faults.  Their  organization  according  to 
craft  instead  of  according  to  industry,  and  the  exclusiveness  of 
many  of  them,  lead  to  the  greatest  amount  of  confusion.  But 
they  are  evolving  a  wiser  leadership,  and  may  be  depended  on 
as  a  great  force  in  industrial  reconstruction.  They  are  going 
to  be  improved  not  by  such  campaigns  as  the  recent  'Open 
Shop'  campaign,  directed  by  many  toward  the  annihilation  of 
unionism,  but  by  a  recognition  that  here,  as  well  as  abroad, 
labor  has  decided  to  bargain  collectively,  through  organizations 
of  their  own  choosing,  and  that  unions  should  be  dealt  vfith 
as  legitimate  representatives  of  labor,  not  as  outlaws." 


136   CURRENT  ECONOMIC  PROBLEMS 

must  be  nameless,  but  the  writer  can  vouch  for 
the  genuineness  of  the  letter. 

"About  a  year  ago  I  wrote  you  a  very  sarcastic 
letter,  regarding  your  companies'  methods  of  han- 
dling labor ....  As  this  is  a  world  in  which  we  live  and 
learn,  and  time  alone  proves  right  from  wrong,  I 
want  to  be  as  fair  to  you  today,  as  I  was  unfair 
a  year  ago.  I  want  to  tell  you,  that  you  were  right 
and  I  was  wrong.  I  wish  to  apologize  to  you  like  a 
man  for  writing  that  letter.  At  the  time  I  wrote  it 
I  was  sincere  in  my  belief  that  capital  did  not  deal 
fairly  with  labor,  but  I  have  traveled  in  France, 
England,  Scotland  and  Spain  since  I  wrote  you,  and 
have  always  studied  labor  wherever  I  went.  I  am 
sorry  to  say  that  labor  has  abused  its  power  as  much, 
if  not  more,  than  what  capital  ever  done I  wit- 
nessed the  coal  strike  in  England,  and  attended 
some  of  their  meetings.  They  only  know  one  thing, 
their  own  side  of  the  dispute. 

"One  of  the  chief  causes  of  unrest  in  the  world 
today  is  the  labor  unrest.  We  don't  want  and  we  do 
not  need  strikes,  what  we  need  is  more  production. 
An  honest  day 's  work  for  an  honest  day 's  pay.  I  can 
never  see  where  you  benefit  by  a  strike.  If  a  body 
of  men  should  win  a  strike,  they  lose  in  the  long 
run,  because  they  lose  more  money  while  on  a  strike 
than  what  their  gains  amount  to.  They  also  lose 
the  mainspring  of  their  work,  which  is  the  enthu- 
siasm and  interest  they  had  in  their  work  before  the 
seeds  of  discontentment  set  in.  To  my  way  of  think- 
ing today,  there  is  absolutely  no  reason  why  labor 
and  capital  cannot  meet  on  a  midde  ground  and 
settle  their  disputes  without  bitterness  creeping  in. 
They  can  if  they  will  only  be  fair  with  each  other, 
but  it  seems  as  if  some  of  them  is  always  figuring  on 
slipping  something  over  the  other  fellow I  think 


FACING  THE  FACTS  187 

that  if  men  felt  like  they  could  go  to  their  employers 
when  they  have  a  grievance,  or  thought  they  had  a 
grievance,  and  talk  to  him,  man  to  man,  and  that  he 
would  listen  and  reason  with  them  to  be  fair  and 
honest,  you  would  soon  do  away  with  all  the  unrest 
of  labor 

"In  ever}'^  country  and  every  meeting  I  ever  at- 
tended I  have  always  spoken  of  the  loyalty  of  em- 
ployees of  the  Company.  You  can  safely  say  that 
you  have  the  most  loyal  and  efficient  group  of  men 
and  women  in  your  employ  of  any  organization  in  the 
world.  It  is  something  that  grows  on  you.  You  can- 
not work  for  the  Company  long  before  you  are  either 
one  or  the  other,  either  you  are  intensely  loyal  or 
you  are  not  the  type  that  has  made  the  business 
what  it  is  today.  If  you  are  of  that  type  you  never 
get  it  out  of  your  blood 

"In  closing  I  want  to  say  that  although  you  were 
slow  in  starting  to  meet  the  advance  cost  of  living, 
that  your  company  has  acted  splendidly  by  their 
employees.  I  am  honest,  and  while  you  told  me  in 
your  office  that  day  that  you  would  gradually  work 
out  the  wage  question,  I  did  not  believe  you  at  that 
time.  I  did  not  think  you  were  sincere.  Once  again 
showing  me  that  I  was  wrong  and  you  were  right. 

"In  closing,  I  will  say  this  and  you  can  use  it 
wherever  you  like  or  whenever  you  like,  and  it  is 
this,  that  while  I  have  worked  for  several  different 
companies,  traveled  in  several  different  countries, 
and  met  men  of  all  kinds,  I  never  have  received  as 
fair  and  square  treatment,  never  worked  with  a 
cleaner,  fairer  and  squarer  bunch  of  men  and  women 
than  when  I  was  with  the  Company.  I  also  want  to 
thank  you  personally  for  the  square  way  you  treated 
me.  Most  employers  would  have  discharged  me  at 
once.  It  has  taken  time  to  make  me  realize  those 
things  but,  I  am  grateful  to  you  nevertheless. ' ' 


INDEX 


Adams,  H.  C.  "Description  of 
Industry,"    21. 

Aldrich   Report,    95. 

Amalgamated  Clothing  Workers 
of    America,    129,    135. 

American  Government,  origins  of, 
89;  statement  of  Thomas  Jef- 
ferson with  respect  to  funda- 
mental principles  of,  40 ;  Indi- 
vidualism   under,    40. 

American    Revolution,    39. 

Amherst,   90. 

Autocracy,  German  development 
of,  in  paternalistic  and  com- 
munistic forms,  41,  42;  not 
admitted  by  modern  socialists 
to  be  feature  of  true  Marxian 
philosophy,  43,  45,  46;  consid- 
ered with  respect  to  organiza- 
tion of  human   body,   47,   48. 

B 

Babylon,   19-20. 

Bacon,  Lord,  19. 

Bank  credit,  use  of,  as  money, 
77,  79;  relative  importance  of, 
as  compared  with  coin  and 
currency,  77;  close  relations  of, 
to  amount  of  demand  deposits, 
79;  relation  of,  to  business 
cycle,   80-84. 

Bank  deposits   (see  Bank  credit). 

Bank  loans  (see  Bank  credit). 

Belgium,  65. 

Bell  Telephone  System,  102. 

Bolshevist  Government  (see  Rus- 
sia  and   Communism). 

Boudin,   Louis   B.,   48. 

Bowley,    Prof.,    120. 

Boycott,    134. 

Bradst reefs,   95. 

Bureau  of  Foreign  and  Domestic 
Commerce,  107. 

Bureau  of  Industrial  Research, 
115. 

Bureaucracy  (see  Autocracy). 

Burke,    Edmund,    35. 

Business  cycle,  harmful  effects  of 
depressions  related  to,  60;  de- 
scribed, 73-78;  control  of,  nec- 
essary   prior    to    inception    of 


depression,    83-84 ;    possible 
methods  of  controlling,  84. 
Business    depressions    (see    Busi- 
ness cycle). 

C 

Capital,  proportion  of  national 
income  accruing  to  owners  of, 
29,  62,  103-106;  defined,  88; 
constructive  purposes  served  by 
private,  50;  relative  unimpor- 
tance of  charges  for,  51,  52; 
advantages  in  widespread  pri- 
vate ownership  of,  53;  trend 
of  wages  in  relation  to  retxirn 
on,  54;  bulk  of  larger  incomes 
derived  from  rents  and  return 
on,  103;  profits  of,  in  competi- 
tive business,  108-110;  distri- 
bution of.  by  rates  of  return 
in  competitive  business,  108- 
109;  figures  as  to  profits  of,  in 
going  concerns  claimed  to  be 
misleading,  108-110,  123-124; 
average  rate  of  return  on,  122- 
124;  average  return  on,  in 
time  of  Adam  Smith,  122-123; 
probable  true  rate  of  return 
on,  124;  classification  of  in- 
vested, by  rate  of  return,  125- 
126;  return  on,  in  sub-marginal, 
marginal,  and  supramarginal 
concerns,  125-127;  relative  mo- 
nopoly power  of,  127-128;  so- 
cialistic attitude  toward  neces- 
sary return  on,   128-129. 

Centralized   power    (see 
Autocracy). 

China,   13. 

Communism,  German  origin  of, 
4  1  ;  bureaucratic  autocracy 
under,  42 ;  relations  of,  to 
modern  socialism  and  Marxian 
philosophy,   43;  defined,  45,   46. 

Communist  Manifesto,   23. 

Competition,  in  relation  to  theory 
of  labor  as  "residuary  legatee." 
70;  profits  under  conditions  of, 
108-110,    122-127. 

Construction  (see  Industrial 
equipment). 

Corporations,  compared  with 
vital    organs    and    controlling 


139 


140   CURRENT  ECONOMIC  PROBLEMS 


ganglia  in  human  body,  48; 
only  form  of  organization 
capable  of  administering  in- 
dustry,   57. 

Crises   (see  Business  cycle). 

Crompton,  22. 

D 

Day,   E.   E.,   90,   92. 

Declaration  of  Independence,  41. 

Descartes,  22. 

Desires,  normal  human,  17. 

Dictatorship    (see  Autocracy). 

Distribution    (see  Production  and 
distribution). 


Economic   Institute,    114. 

Egypt,   19-20. 

Employees  asssociations,   134. 

Employment,  tendency  toward 
automatic  provision  of,  for 
new  workers,  65-66;  required 
for  2,000  new  workers  each 
day,  66;  method  of  absorption 
into,  applies  similarly  to  im- 
migrants, native  born,  and 
those  released  by  labor  saving 
machinery,  66-67;  relation  of, 
to  business  cycle,   74,    76,   78. 

Engels,   23. 

England,   20-25,   96-97,   110,   136. 

Euler,  22. 

Expenditures,  total  of,  substanti- 
ally equal  to  total  income, 
61 ;  forms  of,  61  ;  savings  as 
indirect  form  of,  61 ;  round 
flow  of,  61-65 ;  effect  of  inter- 
national trade  on  round  flow 
of,  65;  relation  of,  to  business 
cycle,    74-75. 

F 

Fabian    Bureau,    89. 

Federal  Congress,  48. 

Federal  Income  Tax  Bureau,  103. 

Federal  Reserve  Bank  of  New 
York,    90. 

Federated  American  Engineering 
Societies,  "Waste  in  Industry," 
111. 

Feud   spirit,    in   industry,    11,    12. 

Ford,  Henry  Jones,  "The  Natural 
History  of  the  State,"  36. 

Foresight,  importance  of,  in  in- 
dustry,  57. 

France,    97,    186. 


Galileo,    22. 
George  III,   21. 
Germany,  41,   42,   44,   97. 


Government     (see     Organization, 

social  and  industrial). 
Greece,  21. 

H 

Hargraves,   22. 

Harvard,   90. 

Harvard  Committee  on  Economic 
Research,  114. 

Hillquit,  Morris,  43. 

History,  industrial,  prior  to  In- 
dustrial Revolution,  19-22;  dur- 
ing Industrial  Revolution,  21- 
26 ;  the  three  stages  of,  27,  28. 

Hours  of  labor  (see  Length  of 
working  day). 

Hyde  Park,   113. 


Immigration,  reasons  for  restric- 
tion of,   117-119. 

Income,  distribution  of,  among 
factors  in  production,  29,  62-63, 
103-106,  121-122;  bearing  of 
taxes  on  effective  distribution 
of,  30;  reinvestment  of,  in 
productive  enterprises,  31 ;  pro- 
portion of,  derived  from  invest- 
ments ordinarily  proposed  for 
socialization,  52,  122;  flow  of, 
directly  related  to  expendi- 
tures, 61;  round  flow  of,  61-65; 
effect  of  international  trade  on 
round  flow  of,  65;  relation  of, 
to  business  cycle,  74-75;  studies 
of  National  Bureau  of  Eco- 
nomic Research  with  respect  to 
size  of  U.  S.  national,  98-99; 
distribution  of,  in  U.  S.  among 
individuals,  100-101,  120-121; 
relative  distribution  of,  be- 
tween official  salaries  and 
wages,  101-103;  tendency  of, 
toward  increasing  or  decreas- 
ing concentration  in  few  hands, 
103;  fallacy  in  belief  as  to 
concentration    of,    119-122. 

Individualism,  among  progenitors 
of  mankind,  36;  protection  of, 
under  American  form  of  gov- 
ernment, 40;  contrasted  with 
socialism,  44;  as  displayed  in 
organization  of  human  body, 
47. 

Industrial  equipment,  necessity 
for  growth  of,  67;  prerequisites 
for  incresise  in,  71;  per  cent,  of 
national  income  required  for 
increase  in,  78;  relation  of  ex- 
penditures for,  to  business 
cycle,    74-78. 


INDEX 


141 


Industrial  Revolution,  description 
of,  21-26;  effect  of,  on  produc- 
tion, 23;  effect  of,  on  popula- 
tion. 23-25;  apparent  effect  of, 
in  developing  business  crises, 
26;  problems  left  unsolved  by, 
26,   38. 

Interest   (see  Capital). 

Interest  rates,  effect  of  taxes  on, 
72;  relation  of,  to  business 
cycle,    75-78. 

International  Federation  of 
Trade  Unions,  110. 

International  Ladies'  Garment 
Workers,    134-135. 

Investor,  constructive  purposes 
served  by  private,  50;  impor- 
tance of,  as  only  dependable 
source  of  foresight,   57-58. 

Ireland,   65. 

Italy,  22. 

J 

Japan,   64-65. 

Jefferson,  Thomas,  "The  Writings 
of   Thomas   Jefferson,"    40. 


Kautsky,    43. 

King,  W.  I.,  studies  of,  90,  92,  98. 
120;  "The  Wealth  and  Income 
of  the  People  of  the  U.  S.,"  98. 

Knauth,  O.   W.,   98. 


Labor,  income  of  and  payments 
to   (see  Wages). 

Labor,  mobility  of,  14;  monopoly 
power    of,    127-128. 

Labor  Bureau,  Inc.,   115. 

Labor  unions,  demand  of  more 
radical,  for  democratizing  of 
industry,  110;  attitude  of,  to- 
ward productivity  and  sabot- 
age, 129;  attitude  of  progres- 
sive employers  toward,   184. 

Laidler,  H.  W.,  "Socialism  in 
Thought  and  Action,"  23. 

Land    (see  Natural   resources). 

Law  of  supply  and  demand,  ef- 
forts at  evasion  of,  83;  fair- 
ness of,  in  fixing  of  relative 
wage   rates,    132. 

Leibnitz,   22. 

Length  of  working  day,  129-130; 
proper  variations  in,  between 
city  and  country,   130-131. 

Lenin,   33,   43. 

Liberty,  individual,  long  strug- 
gle for,  38;  restrictions  upon, 
39. 

London,  lis. 


M 

Macaulay,  T.  B.,  "History  of 
England,"    20. 

Macauley,    F.   R.,    98. 

Malthusian  Doctrine,  24,  26,  97; 
modern  interpretation  of,  116- 
117. 

Management,  problems  of,  13-17; 
under  pioneer  conditions,  13, 
14. 

Management  and  property, 
shares  of,  in  net  value  product 
of  highly  organized  industries, 
104-105. 

Marx,  Karl,  quoted,  23;  theories 
of,  41,  43;  referred  to,  119,  120. 

Meredith,  H.  O.,  "Economic  His- 
tory of  England,''  figures 
adapted  from,  96,  97. 

Mitchell.  Wesley  C,  98. 

Money,  quantity  theory  of,  79-83; 
tendency  to  expand  supply  of, 
through  full  utilization  of  bank 
credit,  80;  relations  of,  to  busi- 
ness cycle,  80-83. 

Monopoly,  profits  of,  70-71,  129; 
relative,  power  of  labor  and 
capital.    127-128. 

Moscow  Trades  Union  Interna- 
tional, 110. 

N 

National  Bureau  of  Economic 
Research,  "Income  in  the 
United  States,"  91,  98-102.  104- 
105,    107,   114,   120. 

National  Industrial  Conference 
Board,    114. 

Natural  resources,  per  cent,  of 
national  income  accruing  to 
owners  of,  29,  62-63,  103-106; 
rent  of,  important  element  in 
larger  individual  incomes,  103; 
relations  of,  to  population  and 
standards  of  living,  116-117, 
relative  monopoly  power  of, 
127,    128. 

Net  value  product,  division  of,  in 
highly  organized  industries, 
104-105. 

Newton,  Isaac,   22. 

North  Sea.  86. 

O 

Organization,  human,  beginnings 
of,  18.  19. 

Organization,  social  and  indus- 
trial, proper  demands  upon, 
37,  38;  compared  with  organi- 
zation of  human  body,  47,  48; 
functions  of,  classified,  49,  50; 
necessary    gradations    in,     50; 


142   CURRENT  ECONOMIC  PROBLEMS 


fundamental  principles  of  op- 
eration of,  60;  practical  re- 
quirements with  respect  to,  87- 
88;  trend  of  sound  develop- 
ment in,  88;  political  dangers 
arising  from  false  development 
of,  88-89;  socialistic  claims  as 
to  trend  of,  89 ;  tests  of  present 
strength  and  weakness  of,  89- 
90;  a  constructive  program 
with  respect  to,  132-137. 


Penelope.   21. 

Pittsburgh,  11. 

Plumb,   57. 

Pollak  Foundation,  114. 

Population,  increase  resulting 
from  Industrial  Revolution,  23; 
chart  of  increase  in  England 
and  Wales  from  1100  to  1900, 
25;  rate  of  Increase  in,  in  U. 
S.,  68 ;  relations  of,  to  natural 
resources  and  standards  of  hv- 
ing,  116-117;  relations  of,  to 
military  and  economic  conflict, 
117. 

Prices,  proportion  of,  due  to  sal- 
ary and  wage  payments,  33, 
55;  increases  in,  due  to  mul- 
tiplicity of  styles  and  designs, 
55;  effect  of  taxes  on,  68-69; 
relations  of  business  cycle  to, 
75-78;  inflation  of,  at  culmina- 
tion of  boom,  82 ;  importance 
of.  under  hypothetical  labor 
standard  of  value.  131. 

Product  (see  Net  value  product). 

Production  and  distribution,  in 
relation  to  economic  activities, 
59-85. 

Production,  physical,  rate  of  in- 
crease in,  68 ;  relation  of,  to 
business  cycle,  74-78;  statistics 
relating  to,  90-92. 

Productivity,  losses  in,  due  to 
war,  68;  relation  of,  to  busi- 
ness cycle,  76,  78;  dependence 
for  material  welfare  upon.  85; 
importance  of  maintaining 
steady  increase  in,  85;  statis- 
tical evidence  of  fundament- 
ally sustained  Increase  in,  98; 
labor  union  claims  as  to  cause 
of  increases  in,  98;  labor  union 
attitude  toward,   129. 

Profits    (see  Capital). 

Prussia,  42. 

R 

Railroads    (see   Utilities,   public). 
Railway  Brotherhoods,  184. 


Renaissance,    22. 

Rent    (see  Natural  resources). 

Representative  assemblies,  com- 
pared with  central  brain  in  hu- 
man  body,   48. 

Revival  of  Learning,  22. 

Robinson,  James  H.,  "The  New 
History,"  quoted,  18. 

Rome.   21. 

Russia,   33,   43,   45,   46,    58.   89. 


Sabotage,  attitude  of  progressive 
labor  unions  toward,  129. 

Salaries,  effect  of  high,  on  dis- 
tribution of  income,  29 ;  social- 
istic attitude  toward,  29. 

Savings,  per  cent,  of,  necessary 
out  of  national  Income,  73,  106- 
107;  eflFect  of,  in  producing  re- 
vival from  business  depression, 
74-75;  sources  of,  largely  in  in- 
terest, profits  and  rents,  107; 
transfer  of  sources  of,  to  labor 
would  not  release  investment 
fund  for  expenditure  in  hn- 
proved  st.andards  of  living,  107. 

Schoenhof,  J..  "History  of  Money 
and  Prices."  24,  97. 

Science,  rapid  progress  of.  prior 
to  Industrial  Revolution.  22 ; 
practical  applications  of.  at  be- 
ginning of  Industrial  Revolu- 
tion, 22-23;  increase  in  real 
wages  due  to  applications  of, 
during  past  two  generations, 
68. 

Scotland,    136. 

Shop  committee,  134. 

Simplification,  of  commoditiea, 
possible  gains  through,  55. 

Smith.    Adam,    122-123. 

Snyder,  Carl,  90-92. 

Socialism,  attitude  of,  toward 
high  salaries,  29;  attitude  of, 
tow.'ird  waste.  29,  133;  attitude 
of.  toward  inherited  fortunes. 
31 ;  among  the  progenitors  of 
mankind,  36;  contrasted  with 
individualism.  44;  defined,  45- 
4fi;  attitude  of,  toward  private 
capital,  52-53;  demand  of,  for 
democratizing  of  industry,  110; 
incentives  to  productivity 
claimed  under,   188. 

Spain.   136. 

Standard  of  living,  marked  im- 
provement of,  not  practicable 
through  transfer  to  labor  of 
sources  of  investment  fund, 
107. 

Standardization  (see  SimpHflca- 
tion). 


INDEX 


143 


"State   and    Municipal    Enter- 
prise," 89. 

Statistical  Abstract  of  the  U.  S., 
107. 

Sterrett,  J.  E.,  108-109. 

Stewart,   W.   W.,   90,   92. 

Strikes,   134-136. 

Supply  and  demand   (see  Law  of 
supply  and  demand). 


Taxes,  ultimate  eflFect  of,  on  real 
wages,  68-69;  effect  of,  on  in- 
terest rates,  72;  socialistic  at- 
titude toward,   73. 

Trotsky,  33,  43. 

U 

Ulysses,   21. 

U.  S.  Bureau  of  Labor  Statistics, 
95. 

Utilities,  public,  relation  of,  to 
employees,  investors,  and  pub- 
lic, 14,  15;  investment  in,  15; 
necessity  for  growth  of,  15; 
necessity  for  surplus  earnings 
of,  16;  effect  of  public  owner- 
ship on  cost  of  operation  of, 
16;  relative  unimportance  of 
capital  charges  in  connection 
with,  50,  51 ;  payments  for  sal- 
aries  in,    102. 

V 
Value    product     (see    Net    value 
product). 

W 

Wages,  of  public  utility  employ- 
ees, 14,  15;  of  English  car- 
penters and  masons  from  1766 
to  1882,  24;  per  cent,  of 
national  income  received  as, 
29,  62,  103-106;  determination 
of  real,  by  productivity  of  en- 
tire industrial  system,  32 ;  fal- 
lacious   assumptions    with    re- 


spect to  possible  increases  in, 
52-53;  trend  of  return  on 
capital  in  relation  to,  54;  abso- 
lute rather  than  relative  share 
of,  in  product  to  be  considered, 
57 ;  increase  in,  of  skilled 
workers  in  U.  S.  since  1855,  87- 
68 ;  normal  increase  in  real,  68- 
69,  93;  effect  of  unrecognized 
changes  in  commodities  and 
services  on  real,  69;  relation 
to,  of  theory  of  labor  as  "re- 
siduary legatee,"  70;  socialistic 
theory  with  respect  to,  70;  re- 
lation of,  to  business  cycle,  76, 
94;  statistics  relating  to  real 
increase  in,  93-97;  real  in- 
creases in,  subject  to  many 
temporary  checks  and  irregu- 
larities, 93;  English,  French 
and  German  statistics  regard- 
ing, 97:  real  increases  in,  in- 
dicated by  studies  of  per  cap- 
ita national  income  in  U.  S., 
98-99;  possibility  of  increasing 
share  of,  in  national  income, 
106-110;  probable  absence  of 
margin  of  profits  for  increase 
in,  122-128;  application  of  law 
of  supply  and  demand  to  de- 
termination of,  132-133;  abil- 
ity to  pay  more  than  market, 
real  test  of  managerial  skill, 
133. 

Wales.    23,    25. 

Waste,  socialistic  attitude  to- 
ward, 29,  119-120;  apportion- 
ment of  responsibility  for,  by 
Federated  American  Engineer- 
ing Societies,  ill;  fallacy  in  de- 
mand for  100%  elimination  of, 
111-112;  percentage  of,  at  any 
time,  relatively  unimportant  if 
rate  of  increase  in  productivity 
is    high,    112. 

West  Virginia,   11-12. 

Workers  Education  Bureau,  185. 


